Assessing the potential for EU investment in venture capital and other risk capital fund of funds : final report.
Date: 2016-03-02
Institutions: Directorate-General for Research and Innovation
Subjects: EU financial instrument, EU investment, European Investment Fund, development policy, financing, report, venture capital

Assessing the Potential for EU 
Investment in Venture Capital 
and Other Risk Capital Fund of 
Funds 

October 2015 

 
 
 
 
 
 
 
 
 
EUROPEAN COMMISSION 

Directorate-General for Research and Innovation 
Directorate B — Open Innovation and Open Science  
Unit B.3 — SMEs, Financial instruments and State Aid 

Contact: Steve Rogers 

E-mail:  steve.rogers@ec.europa.eu 

RTD-PUBLICATIONS@ec.europa.eu 

European Commission 
B-1049 Brussels 

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
EUROPEAN COMMISSION 

Final Report 

2016 

Directorate-General for Research and Innovation 
Access to Risk Finance 

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
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Table of Contents 

Glossary of Acronyms and terms 

1. 

Introduction - Study Aims and Scope 

1.1 

1.2 

1.3 

1.4 

Study aims 

Study scope 

Methodological approach 

Structure of report and supporting documents 

2.  Problem definition, intervention logic & policy objectives 

2.1 

The role of risk capital in providing finance for innovative start-ups and SMEs 

2.1.1  The SME financing lifecycle 

2.1.2  The equity lifecycle and the role of equity capital 

2.2 

Problem definition 

2.2.1  Demand-side analysis 

2.2.2  Supply-side analysis 

2.2.2.1 

Overall trends in the supply of European VC 

2.2.2.2 

Funding by investment stage 

2.2.2.3 

Funding by source of capital / type of investor 

2.2.2.4 

Performance returns and exits 

2.2.2.5 

Geographic fragmentation and concentration of the VC market in Europe 

i 

1 

1 

2 

3 

5 

7 

8 

8 

9 

11 

12 

14 

14 

16 

18 

24 

29 

2.2.2.6 

The role of wider alternative asset classes (business angels and crowdfunding)  32 

2.2.2.7 

Supply-side baseline situation – summary of key problem drivers 

2.2.2.8 

Challenges in attracting international investors to European VC 

2.3 

2.4 

Definition of policy objectives 

Intervention logic 

3.  Policy context & mapping existing provision 

3.1 

3.2 

Advantages and disadvantages of a fund of funds structure 

EU policy and regulatory framework 

3.2.1  Policy developments relevant to fund of funds. 

3.2.1.1 

Framework conditions (regulatory, fiscal) 

33 

35 

37 

39 

44 

45 

48 

48 

50 

3.3 

Existing provision of equity financing instruments to support innovative start-ups 
and SMEs in Europe 

52 

3.3.1  Introduction 

3.3.2  EU multi-annual programmes in support of venture capital 

3.3.2.1 

EU financial instruments for equity capital in 2007-2013 

52 

53 

53 

 
 
 
 
 
 
 
 
3.3.2.2 

EU financial instruments for equity capital in 2014-2020 

55 

3.3.2.3 
SMEs in Europe. 

Pilot  instruments to support the accelerated growth of innovative  start-ups and 
56 

3.3.3  Other international organisations involved in the provision of European VC 

3.3.4  EIF investment in seed and venture capital 

3.3.4.1 

The EIF’s equity and risk capital financing mandates 

57 

59 

60 

3.3.4.2 

The EIF’s role in ensuring the supply of capital to the European VC asset class  61 

3.3.4.3 
SMEs 

Recent developments at the EIF – expansion in the provision of equity capital to 
62 

3.3.4.4 
European VC 

Analysis  of  advantages  /  disadvantages  of  EIF’s  role  (and  public  money)  in 
63 

3.4 

Fund of funds - investing in European VC 

3.4.1.1 

The EIF’s fund of funds programme 

3.4.1.2 

National fund of funds operators 

3.4.1.3 

Private fund of funds 

4.  Options analysis and Key issues 

4.1 

4.2 

4.3 

Typology of funds of funds 

Identification of options 

Stakeholder views on policy options 

4.3.1  Introduction 

4.3.2  Option 1 – No further action at EU level (counterfactual) 

4.3.2.1 

The public sector - already active in addressing market failures 

65 

66 

67 

68 

69 

69 

70 

74 

74 

74 

74 

4.3.2.2 
Europe 

Private sector and industry association views on the adequacy of VC provision in 
75 

4.3.2.3 

Arguments against maintaining the “status quo” approach 

4.3.3  Option 2 – Increase EU funding for existing equity-based financial instruments 

and FOFs for innovative SMEs 

76 

77 

4.3.4  Option 3 – supporting existing FoFs through an EU scheme to encourage them to 
79 

invest cross-border. 

4.3.5  Option 4 – Set up a pan-European public-private seed and venture capital Fund of 
83 

Funds. 

4.4 

Assessment of risks and the feasibility of the different options 

4.4.1  Introduction – identification of risks and mitigation measures 

4.4.2  Overall assessment of risks 

4.4.3  Assessment of risks specific to policy options 

4.4.4  Overview of the feasibility of the different options 

4.4.4.1 

Feasibility of options 

87 

87 

88 

89 

92 

92 

 
 
 
 
 
 
 
4.5 

4.6 

Synthesis of findings on policy options and identification of preferred option 

Preferred policy option 

4.6.1  The preferred policy option - Option 4.1 – setting up a pan-European fund of 

funds 

4.6.2  Risks associated with the preferred Option 4.1 

4.6.3  The outline of a pan-European FoF programme. 

4.6.4  Steps involved in setting up a pan-European FoF programme 

4.7 

State aids considerations, intervention rates and competition issues 

5.  Conclusions and Recommendations 

5.1 

5.2 

5.3 

Conclusions - rationale for setting up a pan-European FoF programme 

Potential benefits of the establishment of a pan-European FoF programme. 

Recommendations - setting up and operating a pan-European FoF programme 

5.3.1  Structure and set-up of a pan-European FoF programme 

5.3.2  EU funding sources 

5.3.3  Selecting individual fund of funds 

5.3.4  Management and operation of the FoF programme 

5.3.5  Exit and returns 

5.3.6  Attracting investors and achieving a successful fundraising 

5.3.7  Governance and transparency 

5.3.8  Monitoring and evaluation 

92 

94 

94 

95 

97 

100 

102 

104 

104 

105 

106 

106 

107 

107 

109 

109 

110 

110 

111 

5.3.9  A broader support package to promote a sustainable European Venture Capital 

industry and ecosystem. 

112 

 
 
 
 
 
 
 
Glossary of acronyms and terms 

GLOSSARY OF ACRONYMS AND TERMS  

A glossary is now provided in order to help non-specialists understand the key concepts and terms 
used  in  the  report  relevant  to  venture  capital  fund  of  funds  and  private  equity.    The  glossary 
contains (i) definitions of key terms and (ii) a list of acronyms. 

Acronyms  

AUM 

CMU 

COSME 

DIV 

EBRD 

EFSI 

EIB 

EIF 

EVCA 

EVFIN 

FoF 

FO 

GP 

H2020 

IRR  

LP 

PE 

R&I 

RCM 

RCR 

Assets under management  

Action Plan on Building a Capital Markets Union (30.9.2015 COM(2015) 468 final) 

The Programme for the Competitiveness of  Enterprises and Small and Medium-sized Enterprises 
(SMEs) 2014-2020 

Dedicated Investment Vehicle  

European Bank for Reconstruction and Development  

European Fund for Strategic Investments (EFSI) 

European Investment Bank Group 

European Investment Fund  

European Private Equity and Venture Capital Association 

The European Venture Fund Investors Network (EVFIN) is a platform launched in March 2011 by 
major national VC investors in response to the continuing funding  crisis in this sector across the 
EU. 

A fund of funds (note that for simplicity purposes, we refer to FoF in both the singular and plural). 

Family Office 

General Partner 

Horizon  2020  (2014-2020)  under  which  the  Single  EU  Equity  financial  instrument  is  being 
supported. 

Internal Rate of Return 

Limited Partner 

Private Equity 

Research and innovation  

Risk Capital Mandate - the EIF’s former mandate to invest in risk capital financing instruments. 

Risk Capital Resources (RCR) mandate - the EIF’s current mandate to invest in equity instruments. 

DG RTD 

DG Research & Innovation 

SFO 

SME 

SWF  

Single Family Office 

Small and Medium Sized Enterprise 

Sovereign Wealth Fund 

UHNWI 

Ultra-High Net Worth Individual 

VC 

Venture Capital  

VC FoF 

Venture Capital Fund of Funds 

i 

 
 
 
 
 
 
 
 
 
Glossary of acronyms and terms 

Key terms 

Term 

Definition 

Assets under 
management  

AUM, sometimes called funds under management  (FUM), measures the total market value 
of  all  financial  assets  which  are  managed  by  a  VC  fund  manager,  known  as  an  LP  (Limited 
Partnership – see LP). 

Burn rate  

The  rate  at  which  a  start-up  uses  its  venture  capital  funding  before  it  begins  earning  any 
revenue. 

Capital 
commitment 

Investors  in  equity  funds  (and  /  or  fund  of  funds)  commit  to  investing  a  specified  sum  of 
money in the fund partnership over a specified period of time. The fund records this as the 
limited partnership’s capital  commitment. The sum of capital commitments  is equal to the 
size of the fund. Limited partners and the general partner must make a capital commitment 
to participate in the fund. 

Capital 
distribution 

The returns that investors in in equity funds (or fund of funds) receive. This will include the 
income and capital realised from exits minus the fees of the fund manager and any expenses. 
Once a limited partner (LP) has had their cost of investment returned, further distributions 
are actual profit. The partnership agreement determines the timing of distributions to LPs. It 
will also determine how profits are divided among the LPs and general partner (GP). 

Carried 
interest / 
“carry” 

Closing 

The  share  of  profits  or  more  commonly  “carry”  that  the  fund  manager  is  due  once  the 
principal  investment  and  the  agreed  percentage  return  to  investors  has  been  distributed. 
Carried interest is normally expressed as a % of total fund profits. The industry norm is 20% 
for VC funds and circa 10% for fund of funds.  

When  VCs  or  FoF  are  raising  funds,  they  will  announce  the  “first  closing”  when  the  initial 
target level of funds has been reached. This is the point at which a fund can begin investing 
and  drawdown  funding.  A  fund  may  have  many  closings,  but  the  usual  number  is  around 
three prior to final closing when the fund stops accepting new investments. 

Early-stage 
finance   

Venture capitalists invest in enterprises at an early-stage in their development, either when 
the company was only recently established, or is still in the process of being set up. 

Evergreen 
fund 

A  fund  (or  FoF)  in  which  the  returns  generated  by  investments  are  channelled  back  and 
reinvested rather than being distributed back to investors. The aim is to maintain continuous 
supply of capital for further investments to maximise returns by avoiding having to liquidate 
funds and divest  of investments within a  fixed timeframe.  Since value crystallisation often 
occurs during the later stages of a VC fund / FoF’s operation, this ensures that full value is 
captured. 

Exit 

Fees 

In order to deliver a return to investors, FoF and the underlying funds they invest in need exit 
mechanisms  for  their  investments.  GPs  have  three  exit  mechanisms  open  to  them,  trade 
sales,  MBOs  and  IPOs  (the  latter  is  uncommon  in  most  EU  countries,  unlike  in  the  US). 
Venture capitalists normally agree an exit with the company’s management team. Liquidity 
has been helped in recent years by the development of secondary offering, which provides 
an alternative to formal exits (see entry under secondaries).     

A FoF investment vehicle will charge an annual management charge (AMC) to cover the cost 
of administering the vehicle and for remunerating the fund manager. Typically, for FoF, rates 
are  in  the  order  of  1.0-1.1%,  but  can  be  lower,  given  concerns  about  double  layers  of 
charges. The fees for the underlying VC funds are typically 2%. 

Fund of Fund 

The  lifetime  of  a  fund  of  funds  that  make  investments  in  underlying  VC  funds.  Typically, 

ii 

 
 
 
 
 
 
Glossary of acronyms and terms 

Term 

and fund 
duration 

General 
Partner (GP) 

Definition 

underlying VC funds operate on the “10 + 2” principle of a 10 year fund and two years to exit 
the investments in companies (e.g. through trade sales, MBOs and IPOs).  A fund of funds has 
an initial investment period of up to 5 years to select which FMs it will invest in. Therefore, 
the minimum time commitment for a FoF is often 16-20 years (i.e. 5 year investment period 
+ 10 years +2 for the underlying period, plus possibly additional time to wind up the FoF once 
investments have been exited and liquidated. 

The  firm  that  manages  investment  in  private  equity,  either  through  a  fund  of  funds 
intermediary  vehicle,  or  through  direct  investments  in  a  portfolio  of  start-ups  and  SMEs. 
Whereas a FoF manager may be perceived from the perspective of an institutional investor 
as  more  like  a  GP  in  that  they  are  investing  money  on  behalf  of  the  investor,  for  the 
underlying VC funds the FoF manager is an LP: i.e. they are committing capital to the fund 
alongside  other  investors,  but  are  not  part  of  the  deal-making  process,  or  involved  in 
operational issues with portfolio companies.   

UHNWIs and 
HNWIs 

Ultra-high  net  worth  individuals  and  high  net  worth  individuals.  Due  to  tax  breaks  in 
particular  countries,  such  as  France  and  the  UK,  UHNWIs  and  HNWIs  are  among  the  most 
significant investors in seed and early-stage (through angel and VC investments). 

Hurdle Rate  

The performance threshold which the GP has to achieve in order to be paid carry. The hurdle 
rate  is  the  minimum  level  of  return  that  must  be  distributed  to  the  limited  partners  (LPs) 
until  the  general  partner  is  able  to  deduct  carried  interest.  This  ensures  that  the  general 
partner shares in the profits of the partnership only after investments in underlying VC funds 
have performed well. 

Industry vs 
Market 
Statistics 

When reporting on national PE data, a distinction can be made between industry and market 
statistics. EVCA states that industry statistics are an aggregation of figures according to the 
country  of  the  private  equity  firm’s  office  in  charge  of  the  investment.  At  EU  level,  this 
relates to investments made by European private equity firms regardless of the location of 
the target company.  Market statistics are an aggregation of figures according to the location 
of  the  portfolio  company.  At  EU  level,  this  relates  to  investments  in  European  companies 
regardless of the location of the PE firm. For example, Austrian industry statistics refer to all 
investments made by PE firms headquartered in Austria, including those investments made 
abroad. Market  statistics, on the other hand, refer to all investments made in the Austrian 
market, including those made by foreign investors.  

Investment 
period 

The  initial  period  following  fund  (or  FoF)  closure  over  which  investments  in  the  underlying 
funds must be made. For publicly backed FoF, this is typically a period of up to 5 years. Drip-
feeding  funding  into  selected  VCs  over  a  period  of  time  helps  the  FoF  to  diversity  risk  by 
avoiding  having  an  over-focus  on  a  particular  vintage  year.  In  private  FoF,  the  investment 
period is typically 4 years, as is the case for the underlying VC funds in which FoF invest. 

Internal rate 
of return (IRR) 

Time-weighted  return  expressed  as  a  percentage.  IRR  uses  the  present  sum  of  cash 
drawdowns  (money  invested),  the  present  value  of  distributions  (money  returned  from 
investments) and the current value of unrealised investments and applies a discount. A GP’s 
carried interest is often dependent either on the IRR, or a different performance hurdle, such 
as achieving a particular multiple on the original investment. 

Later stage 
finance 

Capital  for  better  established,  high-growth  medium-sized  companies  that  are  close  to 
breaking even or trading profitably. Capital is used to finance late-stage expansion, growth, 
acquisitions and management buy-outs. 

Leverage ratio  A financial measurement of the ratio between the total amount of VC investments and the 

level of EU investment as a cornerstone investor (excluding fees). 

iii 

 
 
 
 
 
 
Glossary of acronyms and terms 

Term 

Limited 
Partner (LP) 

Limited 
partnerships 
(LPs) 

Definition 

in  venture  capital  funds  (e.g.  pension  funds, 

Investors 
insurance  companies,  asset 
management firms) are known as limited partners. These are either institutional investors or 
high net worth individuals that contribute capital to a given private equity fund (or fund of 
fund). 

The standard investment vehicle for investing in VC funds and in fund of funds. An LP has a 
fixed life, usually ten years with the divestment period prior to fund closure usually lasting a 
further 2 years (hence why it is referred to as 10+2). The partnership’s general partner (GP) 
makes  direct  investments,  monitors  these  and  at  an  appropriate  time  juncture  exits 
investments to secure a return for the LP investors. The GP usually invests in the LP’s funds 
over an investment period of between three & five years. During the remainder of the fund’s 
life,  the  GP  attempts  to  achieve  the  highest  possible  return  for  investments  upon  exiting. 
When all investments are fully divested, a LP can be terminated or ‘wound up’. 

Secondaries  

Seed capital 

Ticket size 

The term for the market for interests in VC and PE LPs from the original investors, who are 
seeking  liquidity  of  their  investment  before  the  LP  terminates.  An  original  investor  might 
want to sell its stake in a private equity firm for a variety of reasons: it needs liquidity, it has 
changed  investment  strategy  or  focus  or  it  needs  to  re-balance  its  portfolio.  The  main 
advantage  for  investors  looking  at  secondaries  is  that  they  can  invest  in  PE  funds  over  a 
shorter period than would otherwise be possible. 
The provision of very early-stage finance to a company with a business venture or idea that 
has  not  yet  been  established.  Capital  is  often  provided  before  venture  capitalists  become 
involved. However, a small number of venture capitalists do provide seed capital. 
Commonly,  a  minimum  and  maximum  ticket  size  is  set  during  a  fund-raising  exercise.  
Average ticket size is considerably lower in Europe than in the US1.   

Explanation of fund stage  
  Balanced fund – a venture capital (“VC”) fund focused on both early-stage and development, 

with no particular concentration on either.  

  Early-stage fund - a VC fund focused on investing in companies in their development stage.  
  Generalist  fund  -  a fund  with either a stated focus of investing in all stages of private equity 

investment, or with a broad area of investment activity.  

  Growth fund - funds whose strategy is to invest in relatively mature companies that are looking 

for capital to expand or restructure operations. Later-stage fund  

  A  Venture Capital  fund  -  focused  on  investing  in  later-stage  companies  in  need  of expansion 

capital. 

  Mezzanine fund – a fund that provides (generally subordinated) debt to facilitate the financing 

of buyouts, frequently alongside a right to some of the equity upside. 

  Buyout  fund  -  a  fund  whose  strategy  is  predominantly  to  acquire  controlling  stakes  in 

established companies.  

Source: Invest Europe (formerly EVCA)

1 See for example Talmor and Vasvani (2014). The Extent and Evolution of Pension Funds’ Private Equity Allocations. The 
Adveq Applied Research Series. Coller Institute, London Business School. 

iv 

 
 
 
 
 
 
 
 
                                                           
Authors and acknowledgements 

Disclaimer: The  views and propositions expressed herein are those of the experts and do not  necessarily 
represent  any  official  view  of  the  European  Commission  or  any  other  organisations  mentioned  in  the 
Report. 

This study was led by the Centre for Strategy & Evaluation Services (CSES) and Oxford Research, supported 
by Panteia and New Frontier Services.   

Authorial team 

The authorial team consisted of the following consultants: 

  Mark Whittle – CSES (lead author) 
  Mike Gardiner - CSES 
  Stephan Kreutzer – CSES 
 
  Morten Larsen – Oxford Research 
  Ylva Grauers – Oxford Research 

Jan Smit - CSES 

Wider contributing team 

The  wider  team  contributing  to  the  country  research,  benchmarking  of  FoF  and  case  studies 
included:  

  Maria Bernardita Cardenas Arancibia – New Frontier Services 
 
  Tommy Span – Panteia 

Jacqueline Snijders – Panteia 

High-Level Expert Advisory Panel 

An  advisory  panel  assisted  in  commenting  on  the  deliverables.  This  was  comprised  of  a  combination  of 
academics (with experience of applied research in evaluating venture capital and Fund of Funds programmes 
and VC practitioners. The panel was comprised of the following experts who participated in an independent 
capacity:  

  Professor Gordon Murray, University of Exeter Business School  
  Professor Marc Cowling, Brighton Business School 
  Sophie Manigart,  Vlerick Business School and Ghent University 
  Wojciech Szapiel, Polish Investment Fund 

Acknowledgements  

The  study  team  would  like  to  express  their  appreciation  to  all  the  many  stakeholders  (VC managers,  FoF 
managers, investors and national VC associations) that have contributed to the research.  

Particular  thanks are due to  EVCA (now Invest Europe), the EBRD, EIF and the  BDC (Business  Development 
Bank of Canada), the Arkimedes Fund in Belgium, the British Business Bank and the Danish Growth Fund.  

A full list of interviews is provided in Appendix A. 

Lastly, the study team would like to thank the project officer from DG RTD, Mr Steve Rogers and the Steering 
Committee for the diligent comment and review process during the study research. 

v 

 
 
 
 
 
 
 
 
Introduction - study aims and scope 

1.  INTRODUCTION - STUDY AIMS AND SCOPE  

This document contains the Final Report in respect of the study "Assessing the Potential for EU 
Investment  in  Venture  Capital  and  Other  Risk  Capital  Funds-of-Funds”2.  The  assignment  was 
carried  out  by  the  Centre  for  Strategy  &  Evaluation  Services  (“CSES”)  and  Oxford  Research, 
supported by Panteia and New Frontier Services.  The views expressed in this report are the sole 
responsibility  of  the  authors  and  do  not  necessarily  reflect  the  views  of  the  European 
Commission.  

1.1  Study aims 

The study aims and objectives are, in summary, to: 

  Examine  whether  there  is  a  need  for  further  EU  public  intervention  in  the  European  Venture 

Capital (“VC”) market in order to attract the private sector back to the VC asset class. 

  Assess  the  rationale  for  using  fund  of  funds  (“FoF”)  as  a  delivery  mechanism  for  equity 

investment. 

  Analyse the scope for EU investment in FoF, either by setting up a pan-European VC FoF or by 

investing in one or more public-private, cross-border FoF.  

 

Identify and review alternative configurations of a possible pan-European or multi-country FoF 
during the set-up, operational and exit phases.  

  Examine  the  possibility  of  the  EU  investing  in  existing  regional,  national  or  transnational  FoF, 

and also consider the scope for setting up a pilot FoF. 

The study’s origins stem from a number of relevant EU policy and other developments relevant to 
the setting up of a pan-European FoF (or FoF programme) over a five year period. In March 2010, 
Invest Europe (formerly EVCA), issued a position paper on VC3 that included a recommendation for 
the EU to promote FoF with a significant allocation to VC. This was followed up by further position 
statements  in  November  2011  and  November  20144.  In  the  European  Council  conclusions  of 
February 20115, the European Commission (“EC”) was invited to present a proposal for putting in 
place  an  EU-wide  VC  scheme  building  on  the  activities  of  the  EIF  and  other  appropriate  financial 
institutions, in cooperation with national operators. In October 2011, the former DG Enterprise & 
Industry (now DG GROW) held a workshop on VC FoF6.  

2 The study is part of a Framework Contract for the provision of services to the Commission in the field of evaluation of 
research and innovation programmes and policies" (Framework Contract: 2012/s 144-240132). 
3 http://www.evca.eu/media/27397/evca-venture-capital-white-paper.pdf  
4 
http://www.investeurope.eu/media/340371/141109_EVCA_FOF_scheme.pdf  
5 EUCO 2/1/11 REV 1, para 22: https://www.consilium.europa.eu/uedocs/cms_data/docs/pressdata/en/ec/119175.pdf  
6 Summary report of the FoFs workshop: http://www.scribd.com/doc/213367902/Workshop-VC-FoFs  

Invest  Europe’s  position  statements:  http://www.scribd.com/doc/213369256/EVCA-FoF-Position-Nov-2011  and 

1 

 
 
 
 
 
 
 
                                                           
Introduction - study aims and scope 

Strengthening access to risk capital financing (including equity capital) is among the central planks 
of the EU policy framework in this area. Significant EU funding of €1.13bn has been made available 
in 2014-2020 through the Single EU Equity Financial Instrument7. The ideal outcome from the study 
is  to  determine  a  possible  way  forward  for  subsequent  EU  policy  interventions  to  strengthen  the 
European VC ecosystem. The legal bases of the 2014-2020 COSME and Horizon 2020 programmes 
adopted in December 2013 contain legal provisions for EU investments to be made into FoFs8.  

The rationale for the study is to investigate the potential role of VC FoF as a mechanism to support 
EU research and innovation policy, which includes support for innovative start-ups and SMEs with 
high-growth and internationalisation potential. The 'Access to Risk Finance' component of the 2014-
2015 Horizon 2020 work programme contains provision for a study to assess the potential for EU 
investment in fund of funds (FoF)9. 

1.2  Study scope 

There are a number of aspects to the study scope, namely the:  

  Thematic scope – the focus is on seed and early-stage VC, although the extent to which market 

failures can be identified in respect of other investment stages has also been examined.  

  Geographic scope and the Types of FoF within scope  – the benchmarking analysis of existing 
public-private  partnership initiatives to  set-up  and  operate  FoF  focused  on  Europe.  The  focus 
was  on  identifying  the  main  characteristics  and  to  the  extent  possible,  the  performance 
parameters  of  publicly-backed  FoF  within  the  EU.  Reflecting  the  global  nature  of  VC, 
international  benchmarking  comparisons  were  carried  out  between  the  EU  and  key  global 
competitors, such as the  US, Canada and Australia to assess  the state of development of FoF 
and to compare the average size of VC funds and key performance parameters, to the extent 
data  was  available  on  returns.  Examples  of  international  initiatives  to  attract  private  sector 
investors and FoF managers back to VC have also been analysed, such as the VCAP FoF scheme 
in Canada. 

7 This includes the COSME Programme for SMEs and within Horizon 2020, up to €690m and the  InnovFin SME Venture 
Capital Facility, up to €430m. These programmes are the successor programmes and build on predecessor programmes 
from the previous 2007-2013 programming period. 
8For COSME, see Art. 18 4. (b) and Art. 5 of Regulation (EU) 1287/2013 - page 43 of http://eur-
lex.europa.eu/LexUriServ/LexUriServ.do?uri=OJ:L:2013:347:0033:0049:EN:PDF.  
For Horizon 2020, see Council Decision 2013/743/EU (Specific programme) — p. 996 of 
http://ec.europa.eu/research/participants/data/ref/h2020/legal_basis/sp/h2020-sp_en.pdf  
9  Action 
10 
finance_en.pdf  

http://ec.europa.eu/research/participants/data/ref/h2020/wp/2014_2015/main/h2020-wp1415-

in 

2 

 
 
 
 
 
 
                                                           
Introduction - study aims and scope 

1.3  Methodological approach  

The methodological framework used to carry out the study is summarised in the figure below: 

Figure 1 – Methodological overview  

The assignment was undertaken over three phases, consisting of (i) a structuring phase, (ii) the core 
fieldwork  and data  collection  phase  and (iii) an analysis and report writing phase.    The following 
aspects of the research should be highlighted to demonstrate that the findings are evidence-based:   

  An extensive literature review was carried out, supported by an assessment of key industry data 

on trends and developments in European VC.  

  An  extensive  review  of  performance  data  of  the  VC  asset  class  in  Europe  and  in  competitor 
countries  outside  the  EU  was  undertaken  (see  Appendix  E  -  performance  data  and 
benchmarking).  

  A  problem  analysis  was  undertaken  supported  by  a  demand  and  supply-side  assessment  of 

European VC.  

  The  analysis  of  supply  focused  on:  identifying  the  relative  importance  of  different  sources  of 
investment  in  the  European  VC  asset  class  by  investor  type  (e.g.  high  net-worth  investors, 
business  angels,  single  family  offices,  pension  funds).  The  changing  investor  base  and  the 
increasing dependence of European VC on the public sector were examined. 

  The analysis of demand focused on whether innovative firms with high-growth potential could 
obtain  access  to  capital  and  whether  there  is  a  sufficient  flow  of  high-quality,  investor-ready 
start-ups and existing firms seeking growth and expansion capital. 

3 

 
 
 
 
 
 
  
Introduction - study aims and scope 

  A mapping and benchmarking exercise was undertaken of existing publicly-backed FoF funded 
at national level and by the EIF, as well as of EU risk capital financing instruments in the 2007-
2013 and 2014-2020 programming periods.   

  The  focus  of  benchmarking  individual  FoF  was  to  gain  an  understanding  of  the  main 
characteristics  relating  to  their  set-up,  operation  and  performance.  Among  the  parameters 
assessed were their size, sources of financing, sectoral focus and the investment stage(s) they 
covered.  

  A review of the managerial set-up, remuneration arrangements and performance incentives for 

FoF managers was carried out. 

  An interview programme was  undertaken with 105 stakeholders active  in (or with an interest 
in) the European VC ecosystem and in supporting innovative start-ups and SMEs, such as with 
investors  (LPs),  public  and  private  FoF  managers,  VC  managers  (GPs),  and  national  VC 
associations.  

  An  assessment  of  the  different  policy  options  and  sub-options  was  conducted  based  on 
stakeholder  feedback.  Issues  relating  to  the  design, set-up  and  operation  of a possible  future 
pan-European  FoF  were  analysed,  such  as  how  many  FoF  should  be  set  up  within  a  FoF 
programme,  their  target  size,  selection  criteria,  alignment  of  interest,  investment  period,  the 
procurement  mechanism  for  appointing  a  FoF  manager,  management  incentives  for  FoF 
managers and the returns structure for investors (e.g. asymmetric returns vs. pari passu). 

 

In  order  to  help  advise  the  EC  in  “operationalising”  a  pan-EU  FoF,  relevant  EU  legislation  on 
state aids and pertaining to setting up new financial instruments has been reviewed in detail, 
notably: 

  Title  VIII  of  the  EU  Financial  Regulation,  which  addresses  financial  instruments 

(applicable to the general budget of the Union and its rules of application). 
  Article 21 of the 201410 revised General Block Exemption Regulation (GBER).   

 

In order to validate the study findings, the conclusions and recommendations were presented 
at a workshop held on 24th September 2015 to present the findings to the Commission services. 

10 Aid for access to finance for SMEs Risk finance aid (Commission Regulation (EU) No 651/2014 of 17 June 2014 declaring 
certain categories of aid compatible with the internal market in application of Articles 107 and 108 of the Treaty. 

4 

 
 
 
 
 
 
 
 
                                                           
Introduction - study aims and scope 

1.4  Structure of report and supporting documents 

An overview of the structure of the Final Technical Report is now provided: 

Section 
Section 2 

Detail 
  Outlines  the  importance  of  ensuring  continued  access  to  equity  capital  (seed, 
venture, growth and expansion) for high-growth start-ups and SMEs (“gazelles”).   
  Analyses the role of FoF as an intermediary mechanism to enhance the supply of 

funding to the European VC asset class.   

Section 3 

  Examines  the  problem  definition  and  assessment  of  demand  and  supply-side 

issues linked to the problem definition. 
  Provides an analysis of the intervention logic. 
  Definition of policy objectives. 

Section 4 

 

Identification and analysis of the different options / sub-options and their relative 
advantages/ disadvantages.  

  An  assessment  of  the  feasibility  and  risks  associated  with  implementing  the 

different options.  

  Analysis of stakeholder views within the European VC ecosystem on the options. 
 

Identification  of  a  policy  option  preferred  by  a  majority  of  stakeholders,  and 
consideration  as  to  whether  any  supplementary  options  might  be  implemented 
either in parallel or subsequently. 

  Assessment  of  state  aids  issues  relating  to  setting  up  EU  risk  capital  financing 

schemes.    

Section 5 

  Overall conclusions and recommendations on implementation. 

There are in addition a number of supporting standalone documents: 

Supporting document 1 – Technical Annexes  

  The appendices provide detailed evidence to support the core research findings.  

  Appendix A: List of interviews completed during the study. 

  Appendix B: Case studies. 

  Appendix C: Literature review to examine the findings from previous evaluations and studies to 
examine  the  efficiency,  effectiveness  and  impacts  of  different  equity  instruments.  Review  of 
existing fund of funds 

  Appendix  D:  Country  Fiches  presenting  the  situation  with  regard  to  venture  capital,  key 
stakeholders in VC, existing funds and FoF and regulatory framework in EU Member States. 

  Appendix E: Performance data and benchmarking of the European VC asset class, international 

comparisons. 

  Appendix F:  Bibliography. A list of studies, evaluations, research papers and other information 

and data sources examined.  

5 

 
 
 
 
 
 
 
 
Introduction - study aims and scope 

Supporting document 2 – Assessment of key implementation issues - setting up and operating a 
pan-European Fund of Funds Programme.  

  This  document  addresses  the  16  issues  identified  in  the  Tender  Specifications  relating  to  the 
set-up  and  operation  of  a  public-private  pan-European  FoF,  together  with  a  review  of  exit 
mechanisms and returns structures. A benchmarking assessment of existing approaches to the 
set-up and operation of FoF is provided, and the merits and drawbacks of different alternative 
FoF  models  are  considered.  This  document  provides  evidence  to  support  the  proposed 
configuration of a pan-European FoF programme and of individual FoF, drawing on the evidence 
obtained through the benchmarking of existing FoF. 

Supporting document 3 - Country fiches on VC provision. 

  This document contains country fiches in a representative sample of 12 EU Member States to 
examine the state of development of the VC industry. This includes a focus on both countries 
with  more  mature  VC  markets  and  on  under-developed  markets.  The  extent  to  which  equity 
capital provision is available  to innovative SMEs through angels, seed and  early-stage  VC, and 
possible barriers is examined. 

6 

 
 
 
 
 
 
Policy context & mapping existing provision 

2.  PROBLEM DEFINITION, INTERVENTION LOGIC & POLICY OBJECTIVES 

This  section  examines  the  importance  of  access  to  equity  capital  (seed,  venture,  growth  and 
expansion)  for  high-growth,  innovative  European  start-ups  and  firms.  A  detailed  demand  and 
supply-side  analysis  is  also  provided  as  part  of  the  problem  definition.  An  assessment  of  the 
intervention logic is then provided. The definition of policy objectives is also provided. 

Table 1 – Key points 

The role of equity in the SME financing lifecycle  

1.  Although equity only represents a small percentage overall of SME sources of finance, but it is crucial to 

facilitate the accelerated growth and development of high-growth innovative gazelles. 

2.  Following the global economic and financial crisis, banks are becoming more risk-averse, especially for 
start-ups  investing  in  innovation.  This  trend  has  been  exacerbated  by  EU  regulation  (e.g.  Basel  III  to 
tighten  capital  adequacy  ratios).  This  may  increase  demand  for  financing  from  alternative  forms  of 
financing (equity, crowdfunding and angels). 

3.  The long-term view required by investors in highly innovative firms, which often only realise full returns 

after several years, is conducive to equity financing. 

Problem definition 

4.  The  rationale  for  EU  intervention  is  driven  by  supply-side  failures  in  respect  of  access  to  innovation 

financing for SMEs throughout the equity financing lifecycle. 

5.  Supply  of  VC  has  fluctuated  in  Europe,  and  private  participants  have  exited  the  market  due  to  low 
returns.  Structural  weaknesses  of  the  European  VC  market  relate  to  small  average  fund  size, 
fragmentation and geographic imbalances, and a lack of cross-border investment. 

6.  Despite a more positive trend in the European VC asset class’ performance in the previous 2-3 years, 
there has not bene a corresponding increase in fund-raising activity, only in later stage PE (buy-outs). 

7.  The small maximum ticket size and lack of scale deters institutional investors.  
8.  The  prevailing  framework  conditions  (regulatory,  fiscal,  culture  of  entrepreneurship,  availability  of 

talent) drive the supply-side dynamics in Europe. 

9.  The public sector is trying to address these supply-side failures and to attract international capital. 
10.  The dominance of public money implemented on behalf of the EC through the EIF means that there is a 

need to promote greater diversity of sources of investment in the VC market. 

Intervention logic 

11.  The  baseline  situation  is  characterised  by  an  over-reliance  on  the  public  sector  as  a  financing  source 
within the European VC market, a lack of private sector interest and opportunity costs in not tapping 
into global sources of capital from international investors.  

12.  Funding  instruments  such  as  Horizon  2020  and  new  instruments  such  as  the  EFSI  are  among  the 

prospective sources of funding (inputs).  

13.  The  expected  results  are  larger  average  size  of  VC  funds  and  increased  private  sector  funding  of 
European  VC.  The  anticipated  impacts  range  from  the  enhanced  attractiveness  of  European  VC  to 
international  investors,  greater  ability  to  support  start-ups  throughout  the  equity  financing  lifecycle, 
in  Europe,  thereby  enhancing  the 
retaining  the  high-growth  potential  of 
contribution of European VC to Europe 2020 and the jobs and growth agenda. 

innovative  gazelles 

Policy objectives 

14.  In  supporting  VC  through  existing  equity-based  instruments  (and  possibly  the  implementation  of 
additional  complementary  objectives),  the  EU  pursues  a  number  of  policy  objectives.  These  include, 
among  others:  ensuring  access  to  equity  finance  for  innovative,  high-growth  start-ups  (“gazelles”) 
during  economic  downturns,  promoting  the  global  competitiveness  of  European  VC  by  attracting  the 
private sector to the asset class, thereby strengthening its future sustainability. 

7 

 
 
 
 
 
 
Policy context & mapping existing provision 

2.1  The role of risk capital in providing finance for innovative start-ups and SMEs 

2.1.1  The SME financing lifecycle  

SMEs  are  a  major  asset  to  the  European  economy  since  they  represent  99%  of  all  businesses, 
account  for  86  million  jobs  equalling  65.5%  of  all  European  jobs  and  contribute  €  3.4  trillion  to 
European GDP in 2012.11 At the same time, 24% of European SME managers are not confident they 
will obtain the financing they need in the future and 15% of them mentioned access to finance as 
the most pressing problem for their business.12  

Moreover,  Europe  lags  behind  the  US  when  it  comes  to  the  size  of  innovative  technology-based 
companies. According to Bank of America Meryl Lynch, measured in terms of market capitalisation, 
North America accounts for 69% of firms globally compared to a mere 3% in Europe.  Start-ups and 
SMEs  need  to  raise  capital  during  the  different  stages  of  the  SME  financing  lifecycle  in  order  to 
grow at different stages in their development trajectory. The sources of finance will vary depending 
on the stage of development. For instance, at the ideas/ conceptual stage, (pre-seed and seed), the 
so-called  three  Fs  –  friends,  family  and  fools,  and  business  angels,  are  an  important  source  of 
finance  for  many  entrepreneurs.  At  the  early-stage  and  later  stage  growth  period,  loans  are  the 
most important source of finance for most SMEs. This is summarised in the following figure:  

Figure 2 - Financing sources for start-ups and SMEs by investment stage 

Source: CSES 
There are two points in the SME development lifecycle when start-ups and early growth stage firms 
risk succumbing to the ‘Valley of Death’. Post start-up stage, as firms embark on the early growth 
stage, they continue to require a combination of funding to cover working capital requirements but 
also to invest in RTDI, production capacity, and in developing both the quantity and quality of their 
human resources. Secondly, following the first round of financing, as firms seek to grow, during the 
early growth stage, particularly for RTDI-intensive SMEs, they will incur a lot of upfront operating 
costs.  Such firms will remain vulnerable to cash-flow problems as the business expands. During the 
early growth stage, additional financing is usually scarce, leading to cash flow strains before 
breakeven is achieved.  Post-breakeven, firms may still risk closure if they cannot obtain the later 
stage and expansion funding needed to grow.   

11 Annual Report on European SMEs 2012/2013. P. 6 & 11 
12 2013 SMEs’ Access to Finance survey. Analytical report. http://ec.europa.eu/enterprise/policies/finance/files/2013-
safe-analytical-report_en.pdf  

8 

 
 
 
 
 
 
                                                           
Policy context & mapping existing provision 

A high proportion of start-up firms will fail before a steady revenue stream can be established for a 
variety of reasons, such as difficulties in raising follow-on funding within an adequate timeframe, a 
lack  of  sufficient  investment  in  innovation  and  R&D  to  bring  new  products  and  services  to  the 
market in a sufficiently timely manner and organisational and managerial challenges in expanding 
sufficiently  quickly.    According  to  a  report  for  Invest  Europe13  "some  evidence  points  to  private-
equity-backed  companies  being  less  likely  to  fail  than  companies  on  average  and  a  higher 
productivity  of  6.9%”.  It  is  difficult  to  generalise  about  survival  rates,  since  a  distinction  can  be 
made between: 

  External  variables,  such  as  the  stage  in  the  economic  cycle,  which  influences  the  extent  to 

which financing to optimise growth potential is likely to be available. 

  Firm-specific variables,  such as the  sector in which the  firm operates, the  level of innovation 

and its growth prospects, and the types of products and services the firm specialises in.   

2.1.2  The equity lifecycle and the role of equity capital  

Equity  capital  (including  hybrid  equity and  loan  instruments)  is  an  important  financing  source  for 
high-growth,  innovative  start-ups  and  SMEs.  However,  it  should  be  noted  that  the  use  of  equity 
capital is atypical and only represents a very small percentage of all start-ups and SMEs. According 
to  an  economic  analysis14  to  support  the  September  2015  Communication  on  a  Capital  Markets 
Union15, only 4% of micro firms and 6% of small firms utilise equity finance.  

Table 2 - Use of financing instruments by non-financial corporations  

Micro 

Small 

Medium 

Large 

(percentage averages out of total sample over 2009-2014) 

Retained earnings 
Grants/subsidised 
loans   
Bank overdrafts 
Bank loans 
Trade Credit 
Other loans 
Leasing 
Debt securities 
Mezzanine 
Equity 

24 
12 

38 
28 
26 
9 
19 
1 
1 
4 

30 
16 

43 
39 
30 
12 
40 
1 
2 
6 

38 
20 

40 
43 
35 
19 
50 
1 
4 
8 

46 
22 

42 
48 
38 
28 
56 
4 
6 
9 

Sources: ECB and European Commission Survey on the access to finance of enterprises. 

However, although small in absolute terms as a percentage of total SME financing needs, they are 
crucial  to  the  success  of  Europe’s  economy,  since  firms  benefiting  from  equity  financing  are 
characterised by: 

  An accelerated growth trajectory compared with the majority of European start-ups / SMEs; 

  A  high  level  of  innovation  (not  only  in  products  and  services,  but  also  organisational  and 

process) growth and employment potential; 

  Strong potential scope to scale up and internationalise. 

13 Exploring the impact of private equity on economic growth in Europe, May 2013, Frontier Economics, London. 
14 SWD(2015) 183 final 
15 Action Plan on Building a Capital Markets Union, Brussels, 30.9.2015, COM(2015) 468 final 

9 

 
 
 
 
 
 
 
 
                                                           
Policy context & mapping existing provision 

Start-ups and SMEs accessing equity financing not only gain access to capital, but are also able to 
tap into the entrepreneurial and managerial expertise of angels and VC fund managers. Many VC 
fund managers have significant operational experience in the development of scale businesses, and 
through their networks of contacts are able to put entrepreneurs in contact with strategic partners 
and  are  able  to  provide  financial  and  strategic  advice  relating  to  subsequent  investment  stages 
thereby helping to accelerate the development trajectory of firms. 

There are a number of different types of equity financing and mechanisms through which SMEs can 
access  such  capital.  These  include  business  angels16,  seed  and  venture  capital  funds,  but  also 
equity-based crowdfunding platforms.  The different types of equity funding by round to meet the 
financing requirements of innovative start-ups and high-growth firms are summarised in the table 
below: 

Table 3 - The equity lifecycle - range of funding by investment stage 

Investment 
stage 

Funding 
range (€) 

Pre-seed and 
seed capital 

25,000 
1m  

–

First stage of VC 
financing 

Average 
funding 
realised (€) 
2010-14 

357,000 
(in 
the  US,  by 
contrast,  60% 
of  seed  deals 
in  2014  were 
above  $  1 
million ) 

Early-stage 
capital 
Second stage of 
VC financing 

500,000  – 
2m 

1458m (in the 
US, 
deals 
range  from  $ 
500,000 
-  $ 
25m) 

Description 

Pre-seed financing is designed to research, assess and develop an 
idea or initial concept before a company has reached the formal 
start-up process.  
Seed  financing.  The  enterprise  may  have  already  been  formally 
set-up but is at a very early-stage in its development. 
Investors  are  often  either  angels  or  public  seed  funds. The  level 
of  funding  required  depends  on  the  type  of  firm  &  sector.  EUR 
250,000  to  EUR  1  million  –  top-ranking  VC  firms’  seed 
investment. Publicly backed seed investments are often in lower 
range. 

Early-stage  capital  allows  firms  to  grow  that  may  already  have 
developed  a  product  or  service  but  have  not  yet  achieved 
breakeven  or  they  may  still  be  in  the  process  of  refining  their 
product  and  service  before  bringing 
the  market 
commercially.  This  initial  development  stage  can  be  capital-
intensive. 

to 

it 

16  Angels  are  often  engaged  at  an  individual  level  in  pre-seed  and  seed  funding,  and  provide  advice  and  mentoring 
support to management. Through angel syndicates, they may be in a position to provide early-stage follow-on funding. 

10 

 
 
 
 
 
 
 
 
 
                                                           
Policy context & mapping existing provision 

Investment 
stage 

Funding 
range (€) 

2m –5m 

Later stage  
Third stage of VC 
financing  
(known as 
“Series C”) 

Average 
funding 
realised (€) 
2010-14 
2341m (in the 
US, 
almost 
30% of all late 
VC 
stage 
deals  in  2014 
were  above  $ 
25m) 

5m-100m 

7164m 

Expansion 
capital 

Fourth stage of 
VC financing 
(known as 
“Series D”) 

Replacement 
capital 

NA 

NA 

Description 

Later stage financing facilitates firm growth, also often pre break-
even.  Additional  capital  may  be  used  to  finance  increased 
production  capacity,  market  or  product  development,  or  to 
provide working capital.   
The  product  or  service  provided  by  the  firm  should  be  in 
production  and  be  commercially  available.  The  company 
demonstrates  significant  revenue  growth,  but  may  or  may  not 
yet be profitable.  
Growth-stage  capital  is  often  invested  through  the  Series  C  and 
Series D rounds.  
At  the  expansion  stage,  the  firm  has  already  reached  (or  is 
approaching) breakeven. Expansion capital is a crucial area within 
the  VC  ecosystem  since  it  is  at  this  point  when  recipient  firms 
have  scope  to  scale  up  and  to  internationalise  their  activities.  If 
no  funding  is  available  within  Europe  at  this  stage,  many  high-
growth  firms  seek  funding  and  migrate  to  the  US.  This  means 
European  early-stage  investors  and  the  European  economy 
misses  out  on  value  crystallisation  (jobs  and  wealth  creation 
potential  being  greatest  in  high-growth  firms  with  international 
scalability potential.  
Mezzanine (bridge) – mezzanine finances the step of going public 
and represents the bridge between expanding the company and 
the IPO. IPOs are however much less common in the EU than in 
the US.  
Purchase  of  shares  from  another  investor,  possibly  via  an 
IPO/secondary  offering  or  a  trade  sale,  or  to  reduce  gearing  via 
the refinancing of debt. 

Source: CSES, European data on average funding by investment stage based on EVCA data; US data 
based on Pitchbook 2015 Annual US Venture Industry Report 

There are significant differences in the average size of fundraising at different investment stages 
between the European and US VC ecosystem. Consequently, there are different interpretations as 
to which funding range defines a particular investment stage. Within the EU, the funding range by 
investment  stage  depends  on  the  market  geography  and  state  of  market  maturation,  the  sector, 
RDI  intensity,  market  lead  times  and  other  factors.    Data  on  the  average  size  of  VC  funds  by 
investment stage is provided in Section 2.2.2 – supply-side analysis. 

2.2  Problem definition 

A  problem  definition  has  been  carried  out,  which  includes  a  thorough  demand  and  supply-side 
analysis,  supported  by  appropriate  data.  Comparisons  are  also  made  between  the  structural 
characteristics of the European and international VC sectors. 

The analysis of the problem incorporates the following elements: 

  Describe the nature and scale of the problem, supported by clear evidence;  

 

Identify clearly the drivers or underlying causes of the problem; 

  Describe how the problem has developed over time and how existing policies at EC or MS level 

affect it; 

11 

 
 
 
 
 
 
 
 
 
 
Policy context & mapping existing provision 

 

 

Identify a clear baseline, i.e. describe how the problem is likely to develop in future without EU 
intervention; 

Identify assumptions made, risks and uncertainty involved; and 

  Describe why the problem needs action at EU level (note – this is provided later in the study, in 

the conclusions and recommendations section). 

The above elements are addressed in this sub-section, which is split up into a demand and supply-
side analysis of the European VC market in recent years. An assessment of historical performance 
returns in the asset class is also provided in Appendix E. 

Key hypothesis for the problem definition: 

Innovative,  high-growth  European  SMEs  with  world-class  potential  need  access  to  finance  in 
order to grow, and to scale-up and internationalise their activities.  

However,  there  is  evidence  of  continuing  structural  problems  in  the  size  and  scale  of  the 
European  venture  capital  industry,  which  is  characterised  by  small  average  size  of  VC  funds 
compared with the US, leading to over-fragmentation (also due to their geographic dispersal).  It 
is moreover difficult for some European VC firms to support investee companies throughout the 
equity  investment  lifecycle,  with  evidence  that  fast-growth  European  gazelles  often  decide  to 
relocate to the US during their expansion phase.  

The  inter-play  between  demand-side  and  supply-side  failures  in  respect  of  equity  financing  for 
innovative  start-ups and  SMEs  is central to investigating the rationale for further EU intervention 
through a possible future pan-European public-private FoF.  

2.2.1  Demand-side analysis 

Demand for equity finance will vary according to: 

  Macro-economic factors – the prevailing economic environment, economic fluctuations such as 

the recent global economic and financial crisis, sectoral growth rates, etc. 

  Micro-level  factors  -  the  growth  and  internationalisation  potential  and  level  of  ambition  of 
individual start-ups and SMEs, the degree of innovativeness and technological intensity of the 
product/ service offering developed by the start-up/ SME.   

Innovative  firms  with  high-growth  potential  need  access  to  seed  and  early-stage  risk  capital  to 
support  their  accelerated  growth  and  internationalisation.    However,  equity  finance  is  only 
appropriate  for  a  small  percentage  of  start-ups  and  SMEs  among  the  total  European  SME 
population, including those who seek to accelerate their growth and internationalisation.17.   
An  economic analysis18  to  support  the  September  2015  Capital Markets  Communication  suggests 
that equity finance is used by only 4% of micro firms and 6% of small firms. This corroborates  an 
earlier 2013 survey of SMEs’ access to finance by the EC19, which found that equity financing was 
used by 5% of European SMEs in the previous six months, down from 7% in 2011. It was most likely 
to  be  used  by  publicly-listed  SMEs  (17%),  SMEs  with  a  turnover  higher  than  €  50m  (10%)  and 
gazelles (9%), which are high-growth firms with an accelerated development trajectory.  

17 An economic analysis to support the September 2015 Capital Markets Communication suggests that equity finance is 
used by 4% of micro firms and 6% of small firms. http://ec.europa.eu/finance/capital-markets-union/docs/building-cmu-
economic-analysis_en.pdf  
18 http://ec.europa.eu/finance/capital-markets-union/docs/building-cmu-economic-analysis_en.pdf  
19 http://ec.europa.eu/enterprise/policies/finance/files/2013-safe-analytical-report_en.pdf p. 6 

12 

 
 
 
 
 
 
                                                           
Policy context & mapping existing provision 

Although  demand  is  difficult  to  predict,  the  popularity  of  equity  capital  may  grow  among 
entrepreneurs  in  general  and  gazelles  in  particular,  set  against  a  background  of  more  stringent 
regulations on capital adequacy (e.g. Basel III). Banks are more reluctant to invest in start-ups and 
SMEs  because  of  the  higher  perceived  risks  associated  with  investing  in  seed  and/  or  early  stage 
and associated low survival rates. This has made it more likely that alternative financing forms are 
embraced,  including  external  equity.  Previous  experience  of  implementing  EU  funded  equity 
instruments  such  as  the  High  Growth  and  Innovative  SME  (GIF) within  the  Competitiveness  and 
Innovation  Programme  2007-2013  suggests  that  demand  for  equity  finance  among  start-ups  and 
SMEs is likely to remain strong.  

There  are  however  some  demand-side  bottlenecks,  such  as  poor  investment-readiness  among 
start-ups and early-stage growth firms is a barrier to using risk capital (indeed, there are a number 
of pilot instruments under Horizon 2020 designed to address this problem).   Since the VC industry 
has  experienced  a  significant  decline  in  participation  by  the  private  sector,  the  remaining  private 
equity players in the European VC asset space have exacting standards in selecting deals and have 
access  to  the  best  deal  flow  globally.  This  means  that  only  the  best  start-ups  and  SMEs  secure 
equity capital. An interviewee commented that “only a tiny minority of European SMEs would meet 
their exacting standards”.   

The  high  level  of  selectivity  by  top-performing  fund  managers  in  making  equity  investments  in 
European start-ups and SMEs could paradoxically be regarded as a virtue. By being highly selective 
and only supporting high-growth potential start-ups and early-stage firms, this should improve the 
performance  of  the  European  VC  asset  class  in  the  medium  and  longer  term  by  strengthening 
quality on the demand side (i.e. entrepreneurs) and the supply side (GPs and LP fund managers).  
This  should  lead  to  higher  investment  multiples  (provided  a  benign  of  positive  economic 
environment). 

The fact that VC is only suitable for a small percentage of innovative European start-ups and SMEs 
does  not  negate  the  potentially  significant  contribution  of  the  European  VC  asset  class  to  the 
European economy and the growth and jobs agenda. A disproportionate share of Europe’s future 
economic  growth  and  jobs  are  likely  to  be  generated  by  a  small  percentage  of  high-growth 
European SMEs, as demonstrated in previous literature on ‘gazelles’20.    

Spotlight on gazelles 

There  are  different  definitions  as  to  what  constitutes  a  firm  that  has  successfully  made  the 
transition from being a high-growth firm to a “gazelle” but academic literature suggests that the 
term can be applied to firms with a turnover growth rate of at least 20 % p.a. for three or more 
consecutive  years  (Birch  &  Medoff,  1994;  Birch,  Haggerty,  &  Parsons,  1993;  Reuber  &  Fischer 
2005;  Nicholls-Nixon,  2005,  Sims  &  O´Regon,  2006;  Tatum,  2007).  Autio,  Arenius,  &  Wallenius 
(2000) and Acs, Parsons, & Spencer (2008) however define high growth firms as firms that obtain 
at least 50% turnover growth during each of three consecutive financial years. 

In a recent UK study21, it was observed that demand for equity finance is not always linked to the 
economic  cycle  and  may  be  driven  by  other  factors,  such  as  a  greater  willingness  among 
entrepreneurs to use risk capital. It was noted that "whilst demand for equity finance has increased 
since  the  financial  crisis,  access  to  it  has  become  harder".  This  was  also  due  to  the  fact  that 
alternative financing sources, such as bank and mezzanine finance, have become more difficult to 
obtain during the crisis. 

20 Gazelles -High-Growth Companies- Final report Task 4, Horizontal Report 5, Europa Innova, January 2011 
K. Mitusch and A. Schimke (University of Karlsruhe (TH). 
21  The  Role  of  UK  Government  Equity  Funds  in  Addressing  the  Finance  Gap  facing  SMEs  with  Growth  Potential,  Robert 
Baldock, CEEDR, Middlesex University Business School 

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Policy context & mapping existing provision 

2.2.2  Supply-side analysis  

This section is structured around the following headings:  

  Overall trends in the supply of European venture capital;  

  Funding by investment stage; 

  Funding  by  source  of  capital  /  type  of  investor  (including  a  comparison  with  sources  of 

funding to support VC in the US and EU); 

  Performance returns and exits; 

  Geographic fragmentation and concentration of the VC market in Europe; 

  The role of wider alternative asset classes (business angels and crowdfunding);  

  Supply-side baseline situation – summary of key problem drivers; and 

  Challenges in attracting international investors. 

2.2.2.1  Overall trends in the supply of European VC  

This section sets out data on the size of the European VC industry and highlights recent key trends 
and developments in the provision of VC in Europe and internationally. It also examines the size of 
the European VC industry and makes international comparisons. 

Since the early 2000s, many private sector investors have exited the European VC asset class. This 
trend  began  with  the  “dot  com  crash”  (early  2000s)  and  accelerated  during  the  economic  and 
financial crisis (2007-2009) and the sovereign debt crisis of 2011-2013.  

It can be noted however that the industry has only existed since the early 1980s, and there have 
always been fluctuations, reflecting economic cycles and market shocks. However,  fluctuations in 
risk capital financing supply have become more frequent and pronounced. 

Whereas  returns  have  improved,  and  investment  is  picking  up  in  European  VC,  fundraising 
according to some figures has dropped from 2012-2014 by 33%, unlike in the US where it grew by 
45% over the same period.22 This mismatch between VC returns and investment on the one hand, 
and fundraising on the other can be interpreted as a market failure. 

Invest Europe data shows that European VC funds lack scale and are only half the size of their US 
equivalents23. Between 2007 and 2012, the average size of European VC funds (at final closing) was 
€61 million and 50% of all VC funds were smaller than €27 million, as shown in the table below.  

Table 4 - Average size of a European Venture Capital Fund (2007-2012) 

Amounts 
millions 

in 

€ 

Number of funds 

stage 

Early-stage 
Later 
venture 
Balanced 
Total Venture 

7,488 

3,091 
7,018 
17,597 

Source: EVCA/PEREP Analytics 

126 

41 
120 
287 

(in 

Average 
€ 
millions) Fund size 
59 

(in 

Median 
€ 
millions) fund size 
25 

75 
58 
61 

36 
28 
27 

22 BCG & IESE. 2015. A Rise in Good Deals, but an Investor Drought. P. 6 
23  However,  broad-brush  geographic  comparisons  can  be  misleading  since  there  is  a  need  to  compare  key  innovative 
regions in Europe and the US to look at specific eco-system level characteristics. 

14 

 
 
 
 
 
 
 
                                                           
Policy context & mapping existing provision 

The  average  size  of  mid-market  funds  is  €500  million  -  €  2  billion  and  over  €2  billion  for  large 
buyout funds.24 In contrast, the average US VC fund in 2014 was $130 billion in size. But even in the 
US, 360 out of 635 VC firms managed $25 million or less.25  In the same year, $3,480 billion were 
invested in the US VC market compared to only $1,395 billion in Europe.26  

Reflecting both an improving economic environment and an improvement in performance returns, 
there  was  significant  capital-raising  during  2013  and  2014  for  late  stage  and  buy-out  funds.  For 
example,  growth  fundraising  of  €1.8billion  was  the  highest  level  in  three  years,  an  increase  of 
nearly  70%  compared  to  2013.  However,  interest  among  investors  has  not  yet  returned  to 
European VC. 
The scale of VC activity in Europe is lower than in the US. Data sources27 show that the total level 
of  VC  activity  in  Israel,  the  US  and  Canada  is  significantly  higher  than  in  Europe.    A  2014  OECD 
report  28  noted  that  in  the  majority  of  EU  countries,  “VC  represents  a  small  percentage  of  GDP, 
often less than 0.04%. Exceptions are Israel and the United States, where the VC industry is more 
mature  and  represented  0.3%  and  0.2%  of  GDP  respectively”.    Differences  in  the  level  of  VC 
investment  as a percentage  of GDP between Europe and international comparators are  shown in 
the figure below. 

Figure 3 - Venture capital as a percentage of GDP 

Source: Entrepreneurship at a Glance, OECD, 2014 (c.f. pp 90-91)  

The percentage of GDP invested in European VC (seed, early-stage or later-stage) EU28 was 0.05 or 
below  in  25/28  EU  Member  States  (the  exceptions  being  IE,  FI  and  SE).  A  2015  report  by  BCG29 
confirms that “European VC investments equalled 0.03% of European GDP whereas US investments 
was 0.14% of US GDP. In 2014, the share increased to 0.05% in the EU, whereas it almost doubled 
to 0.29% in the US, demonstrating the dynamics of the US VC market”. 

http://www.ey.com/Publication/vwLUAssets/EY-venture-capital-insights-2013-year-end/$FILE/EY-venture-capital-

24  Invest  Europe.  2014.  Position  Statement.  Accelerating  Innovation  &  Delivering  Growth:    Using  the  Jobs,  Growth  and 
Investment Package to Attract Private Sector Investors to the European VC Industry. Pg. 6 
25 National Venture Capital Association. Yearbook 2015. P. 6 & 20 
26 
insights-2013-year-end.pdf 
27  Sources:  Invest  Europe      2014  yearbook,  MoneyTree  Report,  Data:  Thomson  Reuters,  Pitchbook  PE  Breakdown  2014 
Annual Report 
28 Entrepreneurship at a Glance, OECD, 2014 (c.f. pp 90-91) 
29 BCG & IESE. 2015. A Rise in Good Deals, but an Investor Drought. P. 7 

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Policy context & mapping existing provision 

2.2.2.2  Funding by investment stage  

This sub-section considers the supply of funding by investment stage.  

Fundraising  in  the  European  VC  asset  class  was  concentrated  on  the  buyout  sector  for  more 
mature  companies  (78.7%  in  2014),  whilst  VC  represented  only  9.1%  and  generalist  funds 
accounted  for  3.1%.  Within  the  PE  sphere  in  2014,  some  75%  of  funding  raised  was  invested  in 
buyouts  whilst  only  4.6%  was  invested  in  start-ups,  3.9%  in  later-stage  ventures  and  13.4%  in 
growth. A mere 0.2% was invested in seed capital.30 The scale of investment in VC as a proportion 
of total Private Equity (“PE”) investment does not differ greatly between Europe (9%) and the US 
(7% in in 2013). 

Table 5 – Incremental funds raised by private equity, 2012 to 2014, €’000 

Early-stage 

Later stage venture 
Balanced31 

Total Venture 

Growth capital 

Buyout 

Mezzanine 

Generalist 

2012 

2,190,810 

222,540 

1,461,960 

3,875,310 

540,590 

2013 

2014 

1,714,090 

3.2  

2,266,770 

341,780 

2,552,440 

4,608,310 

1,063,430 

0.6 

4.7 

8.5 

2.0 

312,390 

1,479,580 

4,058,740 

1,796,680 

8.9 

0.9 

5.9 

15.8 

2.2 

5.1 

0.7 

3.3 

9.1 

4.0 

16,729,250 

68.1 

45,441,990 

83.5 

35,145,010 

78.7 

2,107,660 

1,326,700 

8.6 

5.4 

1,517,110 

1,764,420 

2.8 

3.2 

2,266,200 

1,372,720 

5.1 

3.1 

Total funds raised 

24,579,510 

100.0 

54,395,260 

100.0 

44,639,350 

100.0 

Source: Invest Europe 2015 Yearbook, Table 2  32. Statistics include all PE and VC fund managers investing in 
Europe, not only EVCA members. 

The data shows that in 2014, buy-outs accounted for 78.7% of incremental funds raised, far larger 
than  any  other  category  within  Private  Equity,  such  as  4%  on  growth  capital  and  5.1%  on 
mezzanine. Venture capital accounted for only 9.1% in total, a small proportion of total PE funding 
overall. Early stage accounted for 5.1%, and later-stage venture 0.7%. Balanced VC funds accounted 
for a further 3.3% of capital raised. Caution should be exercised in interpreting the figures however, 
since due account needs to be taken of deal flow volume by investment stage. Investment required 
at the seed and start-up phases and in the early funding rounds is considerably lower than at later 
stage or expansion / growth stage (Series C, Series D). 

Although international comparisons are made with elsewhere (e.g. Israel and Canada), comparisons 
are made below between the EU and the US, since the US plays a globally-leading role in European 
VC and therefore provides a key benchmark.  

30 2014 European Private Equity Activity. Fundraising, Investments & Divestments. P. 30 
31 Balanced funds make multiple stage investments i.e. a combination of early and later stage. 
32  Invest  Europe      data  only  covers  a  particular  asset  class  or  type  of  investment  into  start-up  and  other  early-stage 
companies.  However,  the  data  includes  all  EIF  investment  into  VC  funds  in  Europe  under  the  category  “Government 
Agency” so long as they are LPs in VC and private equity funds. Since comprehensive market data is not always available, 
research has also been carried out to estimate the informal, invisible market. 

16 

 
 
 
 
 
 
 
 
                                                           
Policy context & mapping existing provision 

With  regard  to  differences  between  the  EU  and  US  in  the  ease  of  raising  capital  by  investment 
stage,  it  was  noted  by  many  interviewees  that  it  is  significantly  easier  for  entrepreneurs  to  raise 
Series  C and Series  D follow-on funding in the  US than in Europe. Venture  capitalists interviewed 
stated that SMEs in the US seeking expansion phase capital can raise between two and three times 
the level of capital at the corresponding investment stage in Europe. Recent studies33 put this range 
at between two and five times across all investment stages. Although there has been an increase in 
the number of VC and buy-out funds focusing on the expansion stage, it appears to be much easier 
to scale-up and internationalise in the US than in Europe. 

The global economic and financial  crisis has had a major impact on the level of VC deal flow in 
Europe  and  in  the  US.  However,  it  is  notable  that  US  VC  activity  has  recovered  more  quickly,  as 
shown in the following figure, which sets out US VC deal flow by year over the past decade: 

Figure 4 - US VC deal flow by year 

Source: Pitchbook, 2015 Annual Report on the US Venture Industry. 

The data shows that total annual activity in the US VC industry ($6bn in 2014) is significantly greater 
than in Europe. Invest Europe data estimates that the total size of the European VC market in 2014 
was  approximately  €3.6bn34,  an  increase  of  6%.  However,  total  equity  and  other  risk  capital 
financing  investments  (e.g.  hybrid  equity  and  loans)  may  be  underestimated,  since  this  extends 
beyond  formal  seed  and  venture  capital  fund  activities,  and  includes  business  angels  and 
crowdfunding platforms.35.  It should however be recalled that VC supply in the US is concentrated 
in California (i.e. Silicon Valley area), Massachusetts, Texas and to  some extent New York. It does 
not extend US-wide.36 

33 BCG & IESE. 2015. A Rise in Good Deals, but an Investor Drought. 
34 European Private Equity Activity Statistics on Fundraising, Investments & Divestments, 2014, INVEST EUROPE. 
35 Statistics Compendium, EBAN 2014 
36 PWC/National Venture Capital Association. MonetyTree Report. Investments by State Q1 2013 – Q2 2015 

17 

 
 
 
 
 
 
 
                                                           
Policy context & mapping existing provision 

According to Pitchbook's above report, the amount of funding per investment round has increased 
significantly in the US. The report notes that "$59 billion was invested throughout the year across 
5,160 rounds, representing a 16% drop from 2013 (6,124 rounds). The total dollar amount in 2014 
was $20 billion higher than in the previous year ($39.4 billion).  Over 60% of all VC capital invested 
went  toward  $25  million+  rounds  in  2014,  versus  under  half  in  the  previous  two  years.  The 
proportion of capital invested in $25 million+ rounds (64%) was easily the highest percentage since 
the  dot-com  boom".    The  data  found  evidence  of  lower  deal  flow  overall,  but  higher  average 
funding  by  firm  at  each  stage.  In  other  words,  high-growth  start-ups  are  scaling  up  and 
internationalising more  rapidly  and in a more capital-intensive way than was previously  the  case. 
This  can  be  contrasted  with  the  situation  in  Europe,  where  the  research  identified  supply-side 
bottlenecks  in  VC  funds  being  able  to  support  investee  start-ups  beyond  Series  A  and  Series  B 
funding rounds. 

2.2.2.3  Funding by source of capital / type of investor  

This  sub-section  considers  the  type  of  investors  that  currently  invest  in  European  VC  across 
different  investment  stages.  The  sources  of  funding  and  the  role  of  larger  investors  are  also 
considered. It is crucial to understand the needs of the institutional investors regarding alternative 
assets in order to devise an appropriate solution to the problems identified. 

A number of trends in respect of funding by source of capital / type of investor can be noted.  There 
has been a significant reduction in investment in the European VC industry by private LPs relative 
to  the  early  2000s.  According  to  EVCA  data,  investment  has  declined  by  45%  and  the  level  of 
investment in the European VC asset class has only just recovered from 2007 levels. This downtrend 
reflects a number of key trends and developments, such as:  

  The  poor  performance  of  the  European  VC  asset  class  relative  to  other  asset  classes  (see 

Appendix E) and the inadequacy of commercial returns to justify the higher level of risk;  

  The impact of market shocks (the dot com crash) and cyclical fluctuations in capital flows to the 

European VC asset class (e.g. due to the global economic and financial crisis).  

  Regulatory uncertainty associated with the reaction of EU policy makers and regulators to the 
economic and financial crisis and the strengthening of EU regulation on capital adequacy and 
solvency (e.g. Basel III, Solvency II).  

  This  may  deter  institutional  investment  but  also  has  effects  on  the  demand  side  (e.g. 
entrepreneurs in innovative start-ups may experience difficulties in accessing loan funding). 

Many private investors / Limited Partners (LPs) no longer  invest in the European VC asset class 
due to the higher risks and lower performance returns associated with investing in venture. Start-
ups and early-stage growth firms have yielded poor returns, which has deterred the private sector 
from  returning  to  the  asset  class.    However,  individual  investors,  notably  business  angels  and 
other  high-net  worth  and  ultra-high  net  worth  investors  have  continued  to  invest  in  European 
seed and early-stage VC, at least in EU MS where significant tax breaks are offered for investment in 
start-ups and for divestments made through successful exits. 

In response to private investors withdrawing from the market, the public sector has stepped in to 
maintain  risk  capital  financing  availability  during  the  global  economic  and  financial  crisis.  The 
public sector’s role within the European VC ecosystem has consequently increased significantly in 
the  previous  since  the  mid-2000s.  According  to  Invest  Europe’s  2014  Yearbook,  in  2014, 
government agencies contributed 35% of the funds raised followed by pension funds 14%, family 
offices and private individuals (13%), and corporate investors (13%). North American institutional 
investors had a share of nearly 13% as set out in the following figure: 

18 

 
 
 
 
 
 
Policy context & mapping existing provision 

Figure 5 - 2010–2014 – European Venture Capital - incremental amount raised during the year - % 
of total amount 

Source:  2014  European  Private  Equity  Activity  Statistics  on  Fundraising, 
Divestments37 

Investments  & 

The data shows the changing sources of investors in European VC in the past five years. European 
VC funds have become increasingly dependent on public sector funding at a fund of funds level and 
through direct public-private sector co-investment.  

Linkages between sources of capital by type of investor and different investment stages should be 
noted. For example, pension funds only account for a very small proportion of investment in early-
stage  and  later-stage  VC,  because  they  are  risk-averse  and  wary  of  poor  performance  returns. 
However,  they  are  major  investors  in  PE,  with  an  uptrend  discernible  in  the  past  five  years  in 
cumulative investment in growth-stage and buy-out funds.   

Across PE investments in Europe overall, different participation patterns are in evidence by type of 
investor, as summarised below. 

Figure 6 - 2010–2014 - European Private Equity - incremental amount raised during the year - % of 
total amount 

Source: 2014 European Private Equity Activity Statistics on Fundraising, Investments & Divestments 

37 High net worth individuals and angels account for a significant % of funding for pre-seed, seed and early-stage VC but 
are not included in the data in the figure, which covers VC fund structures only. 

19 

 
 
 
 
 
 
 
 
 
 
                                                           
Policy context & mapping existing provision 

In  2013,  the  largest  source  of  funding  was  the  public  sector,  followed  by  angel  investment  from 
private  individuals  and  syndicates.  However,  in  2014,  EVCA  noted  that  the  allocation  to  VC  by 
pension  funds  and  corporate  investors  slightly  exceed  those  to  private  individuals.  An  analysis  of 
investment sources by type of investor is shown in the table below:  
Table 6 Venture Funds raised by type of investor 2012 to 2014, €’00038 

Corporate investors 

522,240 

13.5 

Amounts in € 
thousands 

Academic 
institutions 
Banks 

Capital markets 

Endowments and 
foundations 

Family offices 

Fund of funds 
Government 
agencies 
Insurance 
companies 

Other asset 
managers (including 
PE houses other 
than fund of funds) 

Pension funds 

Private individuals 
Sovereign wealth 
funds 
Unclassified 
New funds raised 

2012 

2013 

2014 

Amount 

% 

Amount 

% 

Amount 

300 

143,910 

45,850 

0.0 

3.7 

1.2 

30,290 

227,480 

307,220 

0.8 

5.9 

8.0 

10,750 

125,030 

28,580 

322,490 

336,260 

216,020 

407,380 

0.2 

2.7 

0.6 

7.0 

7.3 

4.7 

8.8 

101,700 

106,110 

36,100 

% 

2.5 

2.6 

0.9 

438,670 

10.7 

148,510 

207,780 

314,860 

3.6 

5.1 

7.7 

1.270,700 

32.9 

1,468,880 

31.9 

1,226,580 

30.0 

229,860 

5.9 

129,930 

2.8 

91,200 

2.2 

159,410 

4.1 

69,160 

1.5 

61,280 

1.5 

160,780 

265,970 

14,430 

4.2 

6.9 

0.4 

371,700 

746,300 

70,000 

8.1 

16.2 

1.5 

504,880 

250,550 

14,100 

12.3 

6.1 

0.3 

485,400 
3.863,840 

12.6 
100.0 

305,830 
4,608,310 

6.6 
100.0 

590,520 
4,092,840 

14.4 
100.0 

It is interesting to compare the evolution in VC activity overall and by investment stage in Europe 
and in the US. It can be noted that whilst seed and angel activity have significantly lagged behind 
the number of late stage and early stage deals, the number of seed and angel deals has grown 
considerably during the economic recovery. 

38 Invest Europe   Yearbook, 2015.  

20 

 
 
 
 
 
 
  
 
                                                           
Policy context & mapping existing provision 

Figure 7 - US VC deal count by stage  

Source: Pitchbook, 2015 annual report on the venture industry in the US. 
In 2015, a report by BCG39 notes that “European VC investments equalled 0.03% of European GDP 
whereas US investments equalled 0.14% of US GDP. In 2014, the share increased to 0.05% in the EU 
whereas it almost doubled to 0.29% in the US, demonstrating the dynamics of the US VC market”. 

The weak performance of the  European VC asset class has had a knock-on effect  in terms of the 
ability of private fund of funds to attract investors, who also have to justify their additional layer of 
management fees. Consequently, many private FoF managers have exited the market, and only a 
small number of private equity managers remain active in FoF vehicles. 

Some  university  and  family  investors  have  been  long-term  supporters  of  the  best  VC  technology 
investors in the US for decades. Given that Europe mainly has public universities and that there is 
no  culture  of  private  endowments  comparable  to  the  US,  there  is  a  totally  different  scenario  in 
Europe and the US.  University endowments in the US not only have a commercial imperative to 
make  a profit  but  also have  a mandate to pursue other objectives,  such as promoting innovation 
and fostering a culture of entrepreneurship. Such an onus is now very clearly on some universities 
in Europe. For instance, the UK government’s Research Excellence Framework (REF) places a strong 
emphasis on the importance of research impacts and is very pro-entrepreneurship and science. This 
is also the case in other countries such as Germany, Denmark and Sweden. 

There are significantly more university endowments in the US and such endowments are typically 
much  better  resourced  than  their  European  equivalents.    With  the  exception  of  a  handful  of 
university  endowments  such  as  Cambridge  and  Oxford  University40,  there  is  insufficient  capital 
available  through  European  university  endowments  to  become  a  major  source  of  funding  for 
European VC. Whilst Cambridge and Oxford University are European leaders by a significant margin 
(with €5.3bn and €4.3bn respectively) in relation to the size of their endowments, other universities 
in the top 10 lag considerably behind.   

For comparison purposes, the following box shows the comparative sizes of the top 10 university 
endowments  in  Europe  and  the  US.  It  can  however  be  noted  that  the  UK  and  some  other  elite 
the  US.
university 

countries  are  going 

the  direction  of 

in  other 

colleges 

in 

39 BCG & IESE. 2015. A Rise in Good Deals, but an Investor Drought. P. 7 
40 https://en.wikipedia.org/wiki/List_of_European_universities_by_endowment  

21 

 
 
 
 
 
 
 
 
                                                           
Policy context & mapping existing provision 

Table 7- Comparison of university endowments in Europe and the US 

Top 10 university endowments in Europe 

Top 10 university endowments in the US*41 

1. 

Cambridge University  - €5.3bn 

1.  Harvard University, €28.7bn 

2.  Oxford University - €4.3bn 

2. 

Yale University, €18.5bn 

3. 

ETH Zurich, Switzerland - €1,100m 

3.  University of Texas System, €18.2bn 

4.  University  of  Copenhagen,  Denmark 

- 

4. 

Stanford University, €16.6bn 

€1,003.8m 

5.  University of Zurich, Switzerland - €960.4m,  

5. 

Princeton University, €16.2bn 

6.  Utrecht University, Netherlands - €749.0m 

6.  Massachusetts Institute of Technology, €9.8bn 

7. 

Lund University, Sweden, - €724.5m 

7. 

Texas A&M University System and Foundations, 
€7.7bn 

8. 

Central  European  University,  Hungary 
€656.6m 

- 

8.  University of Michigan, €7.5bn 

9.  University of Oslo, Norway - €652.8m,  

9. 

Columbia University, €7.3bn 

10.  University of Helsinki, Finland - €624.0m 

10.  Northwestern University, €6.9bn 

US  data  -  the  NACUBO  report,  2013.  U.S.  and  Canadian  Institutions  Listed  by  Fiscal  Year  2013 
Endowment  Market  Value  and  change  in  Endowment  Market  Value  from  FY  2012  to  FY  2013. 
Source of European data, check of individual university websites. Exchange rate at 30.06.15 (1 €US 
Dollar - 0.89 Euro). European data – check of university websites. 

In the US, the typical size of university endowments is between 10 and 20 times the size of their 
European equivalents. Harvard and Yale University’s combined endowment size dwarfs the size of 
the top 20 European university endowments combined. 
Family offices manage $4 trillion in assets globally42, about 55% of which is based outside of North 
America, according to a 2014 study by London-based researcher Campden Wealth. There are two 
main types of Family Offices, single family offices (SFOs) and multiple family offices (MFOs). There 
are  estimated  to  be  between  3000  and  5000  single  family  offices  (SFO)  in  the  United  States. 
According to some data and information sources, following the financial crisis, family offices in the 
US  have  increasingly  invested  in  VC,  because  other  asset  classes  that  were  ostensibly  “low  risk” 
turned out to be as equally risky as VC but delivered lower returns.  

41 http://www.forbes.com/sites/ccap/2014/07/30/22-richest-schools-in-america/  
42 Europe’s Family Offices, Private Equity and Venture Capital, an EVCA Special Paper, November 2007. 

22 

 
 
 
 
 
 
 
 
 
                                                           
Policy context & mapping existing provision 

However, although investment by Family Offices in the US is often perceived as being significantly 
greater  in  the  US  than  the  EU,  the  data  suggests  that  family  offices  are  a  potentially  significant 
source of funding for European VC, with total family worth exceeding that of the US, although AUM 
is lower.  

Figure 8 - Average Family Office AUM and Total Family Net Worth43 

Source: December 2014 Bloomberg Brief on Family Office. 
A  2007  report  by  EVCA  (now  Invest  Europe)  focused  on  Family  Offices  in  Europe44.  The  report 
examined the allocation by family offices to particular investment types. Approximately 10-15% of 
investments by single family offices (SFOs) are typically in private equity. Among the findings were 
that one-third of family offices interviewed preferred to enter the private equity asset class directly 
rather  than  to  rely  on  intermediaries.  An  advantage  of  working  alongside  private-equity  firms 
rather than through fund of funds is that it pays no fees or carried interest on co-investments.  The 
double  payment  of  fees  and  carry  might  well  be  an  issue  for  some  institutions  when  considering 
whether to invest in FoFs. The deals arranged by GPs managing FoF could ensure that the penalty of 
the structure is not too high. 

However, a significant percentage of SFOs still invest through FoF mechanisms in order to have a 
diversified portfolio, as shown below: 

Figure 9 - Preferred method of entering the private equity asset class 

Source: EVCA/IMD 

43 http://www.bloombergbriefs.com/content/uploads/sites/2/2014/12/Family-Office_December.pdf  
44 Family Offices in Europe, EVCA, 2007. No more recent report with comparable data available. Given the general nature 
of the findings, the position should not have changed fundamentally in recent years. 

23 

 
 
 
 
 
 
 
  
                                                           
Policy context & mapping existing provision 

It is however unclear whether this breakdown is by the number of allocations or is weighted by the 
value  of  the  funds  allocated.  In  terms  of  the  preferred  investment  stage  in  which  Family  Offices 
invest  their  allocation  in  private  equity,  there  is  a  strong  preference  for  investing  in  later  stage 
buyout funds, as demonstrated in the following Figure from the same study.   

Figure 10 - Allocation of family offices to private equity by investment stage (of family offices 
reporting private equity investments) 

Source: EVCA/IMD 

This  could  be  an  argument  in  favour  of  making  a  future  pan-European  FoF  programme  multi-
investment  stage  focused  rather  than  focused  on  seed  and  early-stage,  which  is  much  less 
attractive  to  the  private  sector,  given  the  higher  levels  of  risk  and  perceived  lower  returns.  For 
example, institutions investing in Danish Growth Fund insisted that majority of investment went to 
later stage deals in order to protect future returns. The low target IRR (and the lack of longitudinal 
performance data on the actual IRR) for early-stage public FoF suggests that commercial investors 
would  not  be  interested  in  investing  without  either  a  multi-investment  stage  approach,  an 
asymmetric returns structure or a combination of the two. 

2.2.2.4  Performance returns and exits 

Performance returns in VC 

The  poor  commercial  performance  of  European  VC  (and  of  the  asset  class  globally)  relative  to 
other asset classes is clear from data on historical performance returns. A detailed assessment of 
VC performance is provided in Appendix E. 

In  summary,  outside  a  few  US  tech  VCs,  virtually  all  the  financial  returns  have  been  made  in 
private equity, which prefers to invest in mature undertakings (i.e. in expansion stage investments 
and buy-out  funds),  which are less risky and generate  higher returns. As the figure  below  shows, 
both the EU and the US VC market have shown relatively low returns. It should however be stressed 
that  according  to  many  interviewees,  in  the  period  2013-2015,  VC  returns  have  significantly 
improved.  The  EIF,  for  example,  has  actually  reported  improving  returns  in  recent  years.  The 
returns on their VC fund portfolio increased by 7% between October 2011 and April 2014.45 

45 BCG & IESE. 2015. A Rise in Good Deals, but an Investor Drought. P. 3 

24 

 
 
 
 
 
 
 
                                                           
Policy context & mapping existing provision 

Figure 11 - 5 year rolling average returns in the VC asset class 

SOURCE: THOMSONONE 

Some  data  from  PE  managers  supports  the  impression  of  an  upward  trend  in  the  European  VC 
industry.  According  to  Preqin46,  the  proportion  of  investors  that  find  European  investment 
opportunities  attractive,  has  considerably  increased  in  the  last  years.  In  particular,  the  share  of 
North-America-based  Limited  Partners  (LPs)  that  consider  Europe  as  an  attractive  region  for 
investment had grown from 27% in December 2012 to 60% in December 2013. 

Performance  of  private  equity  investments  in  general  at  a  global  level  seems  to  be  picking  up.  A 
report by Coller Capital found that 93% of LPs anticipate annual net returns above 11% from across 
their  portfolio  over  the  next  3-5  years,  up  from  81%  2  years  ago.  The  more  positive  outlook  is 
driven  mainly  by  buyout  expectations  in  North  America  and  Europe  –  before  Asia.47  In  France, 
according to the Association of Investors for Growth (AFIC)48, the IRR in the private equity industry 
amounted to 10.1% in 2014, up from 9.5% in 2013. For a ten-year-horizon, the IRR is even better at 
11.3% per year as opposed to 10.9% in 2013.  

These findings are confirmed by Thomson Reuters, according to whom European VC performance 
stabilised in 2013. The EIF mapped the evolution of 3, 5 and 10 year IRR in the European VC market 
over the last 15 years49: 

46Preqin. 2014. Private Equity Spotlight. April 2014. 10.04.2014. 
https://www.preqin.com/docs/newsletters/pe/Preqin_Private_Equity_Spotlight_April_2014.pdf 
47 Coller Capital. 2014. Global Private Equity Barometer. Winter 2014-15. P. 4 
48 Ernst&Young. 2015. Performance Nette Des Acteurs Français Du Capital-Investissement À Fin 2014. 
49 EIF. 2014. European Small Business Finance Outlook. P. 36 

25 

 
 
 
 
 
 
 
                                                           
Policy context & mapping existing provision 

Figure 12 – IRR in European VC over time (in %) 

Source: EIF, based on Thomson Reuters data 

As the figure shows, for  the  first  time  since  2008,  the rolling-horizon  IRRs  for  the  5-year  (+1.3%) 
and  the  10-year  (+0.8%)  periods  are  positive at the same time. Data from PE managers supports 
the  impression  of  an  upward  trend  in  the  European  VC  industry.  According  to  Preqin50,  the 
investment  opportunities  attractive,  has 
proportion  of 
considerably increased in the last years. In particular, the share of North-America-based Limited 
Partners (LPs)  that  consider  Europe  as  an  attractive  region  for  investment  had  grown  from 
27% in December 2012 to 60% in December 2013. 

investors  that  find  European 

Performance returns in VC Fund of Funds 

Industry  data  from  2014  on  the  performance  of  FoF  was  obtained  from  VC  managers  in  the 
industry51. Based on a sample of 582 FoF globally, the index shows an end-to-end pooled return of 
21% over one year, 10% over 3 years, 13% over 5 years, 10% over 10 years, and 9% over 15 years. 
For comparison, this level of returns is lower than that of the Standard & Poor Index over a 1, 3 and 
5  years’  time  horizon,  but  higher  than  the  S&P  index  when  running  over  10  years  and  longer.  
Looking  at  data  for  the  past  10  years,  the  one-year  rolling  returns  appear  to  be  highly  volatile  – 
ranging from -21% in 2009 and 2% in 2012 at the low end to 27% in 2007 and 26% in 2011.  Again 
looking  only  at  data  for  the  past  10  years,  data  from  571  FoF  formed  between  1986  and  2012 
suggests that the total value paid in capital multiple to LPs ranged from 0.27 in 2008 to 1.42 in 2007 
with the median moving between 1 and 1.41.  

50 Preqin, 2014. Private Equity Spotlight. April 2014. 10.04.2014. 
https://www.preqin.com/docs/newsletters/pe/Preqin_Private_Equity_Spotlight_April_2014.pdf 
51 The data is still being prepared for a proprietary industry report. The source cannot be revealed at this stage. 

26 

 
 
 
 
 
 
 
                                                           
Policy context & mapping existing provision 

Exits 

Difficulties in achieving profitable and timely exits during the economic and financial crisis have 
put off private investors from investing in European VC in the past five+ years. There has however 
been  progress  in  the  development  of  secondary  markets  to  help  improve  the  liquidity  of 
investments through which stakes in VC funds can be disposed ahead of term.  A disadvantage of 
early  exits  is  that  they  typically  lead  to  lower  returns.    Optimising  returns  requires  long-term 
commitment.  Despite the poor performance in the past, recent data on the number and the total 
value of exits suggests that performance multiples appear to be improving significantly in the past 
2-3  years  in  Europe  and  internationally.  Although  the  improvements  are  focused  on  later  stage 
investment funds, VC returns are also improving. 

With regard to mechanisms for exiting VC investments the types of exits, trade sales, management 
buy-outs and IPOs, the common perception is that the IPO market is much weaker in Europe than 
in the US, and therefore most exits are via trade sales or management buy-outs.  
However, a report  for BVCA52  in the  UK notes that “there  is no difference  in the success  rates of 
European  and  US  deals  from  the  same  vintage  year  with  respect  to  IPO  exits,  while  Europe  has 
about an eight percentage point lower probability of exit via trade sales than the US”.  

The market for trade sales and management buy-outs has been less vibrant than in the US. IPOs as 
an exit mechanism are less common in Europe compared with the US.  Generally, exits in European 
VC have remained stable in recent years, as shown in the table below: 

Table 8 – Exits in Europe 2012-2014 (market statistics)53 

Year 

2012 

2013 

2014 

Exit  (amount  at  cost) 
in € '000 

1,851,258 

2,210,296 

1,864,600 

Number of companies  1012 

1008 

1003 

It remains however  the  case  that  the IPO market in many European countries is either weak  or 
non-existent, a problem exacerbated during the global economic and financial crisis, when investor 
interest in IPOs evaporated. With regard to “average time to exit”, in both Europe and the US, the 
above-mentioned  study  for  BVCA  found  that  the  "probability  of  exit  via  an  initial  public  offering 
(IPO)  has  gone  down  significantly  in  the  last  decade,  while  the  time  to  IPO  has  gone  up  –  in 
contrast, the probability of exit via trade sales and the average time to trade sales do not change 
much over time”. 

There  are  increasing  numbers  of  successful  former  VC  successful  exits  in  Europe.  According  to 
Invest  Europe,  in  2014,  more  than  2,400  European  companies  were  exited,  representing  former 
equity  investments  (divestments  at  cost)  of  €37.8bn.  This  amount  was  the  highest  to  date  for 
European private equity overall, of which VC accounts for circa 1000 (41.6%). A small number of EU 
countries dominate the exits market. For instance, “in the tech sector in 2014, Germany had the 
most  ‘domestic’  company  exits  in  Europe:  59,  compared  to  54  in  the  UK,  although  the  UK  had 
significantly  more  major  ‘home  runs’  (8  out  of  the  20  largest  exits  in  2014  involved  a  UK 
company)”54. EIF data from 2015, too, shows more encouraging results as 15 exits with valuations 
above $ 100 m generated approximately $ 10 billion in exit value.55 

52 European VC: Myths and Facts - Dr. Ulf Axelson and Mr. Milan Martinovic, London School of Economics 
53 EVCA Annual Yearbook 2015 Data. 
54 http://tech.eu/research/4471/european-tech-exits-2014-key-takeaways/ European Tech Exits Report 2014 
55 European Venture Capital - the Facts. Patric Gresko European Investment Fund. Presentation 

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Policy context & mapping existing provision 

The uptrend has had an impact in restoring confidence after the crisis. There is evidence however 
that  whilst  this  has  attracted  private  institutional  investors,  such  as  pension  funds  and  SWFs  to 
invest in later-stage Private Equity (e.g. buy-out funds), it has not led to a return of private investors 
to European VC. It can be noted that there is a lack of comprehensive dataset on European exits, 
since a “very large proportion of exits happen after more than 10 years after the initial investment 
– leading to a concern that only deals with successful and late exits were picked up in datasets”56. 

In the US, there is evidence of a strong uptrend in return multiples. However, unlike in Europe, this 
has translated through to increased investment in VC as an asset class, not only later stages of PE. 
Pitchbook's  2015  Annual  Report  on  the  VC  industry  in  the  US  confirmed  that  2014  was  a  record 
year  in  that 86%  of  VC  fund  closes  hit target.    It was  also  the  strongest year  for  exits  globally  as 
highlighted in the following table:  

Global Venture Exits 

Total Exits: Global exit flow climbed in 2014 with 1,295 exits totalling $95.4 billion, up from 1,283 
exits and $56.5 billion exited last year 

Exits by Region: North America accounted for nearly 83% of global capital exited in 2014. Europe 
realised 12% of total capital exited in 2014. 

Exits by Industry: Software industry exits continue to grow rapidly, accounting for roughly 36% of 
total capital exited globally. Additionally, exits in Pharma & Biotech increased 53% since last year, 
with 136 exits globally. 

Largest Exits in US:  WhatsApp's $22 billion acquisition by Facebook was the largest exit of 2014. 
Other top exits include Nest Labs ($3.2 billion), Oculus VC ($2 billion) and JD.com ($1.8 billion). 

Source: Pitchbook - 2014 Year-End Global Venture Capital Data 

Generating a high return for investors SMEs through equity financing - European exits 

A number of European exits success stories can be noted that were supported during the start-
up,  early  growth  or  expansion  phase  by  VC  funds  that  have  subsequently  increased  in  value 
between  20  and  50  times  for  VC  investors.  Examples  are:  Skype  (Sweden  with  software 
development in Estonia), Spotify (Sweden) and Rocket Internet (Germany).     

There are examples of large exits that received VC and PE-backing, such as MySQL $1bn, Net a 
porter $525m Symbian $317m, Mycitydeal >$400m+ and Bebo $850m. 

The research feedback made clear that central to the success of the above firms in delivering a 
very high rate of return for early-stage VC investors was the availability of successive rounds of 
equity financing to foster the accelerated development of the firms. 

A  further  issue  relating  to  returns  is  that  large  institutional  investors  such  as  Sovereign  Wealth 
Funds (SWFs) have higher returns expectations than publicly-backed fund of funds currently target.  
The  lack  of  a  sufficiently  commercial  approach  means  that  Europe  “misses  out”  on  potential 
international sources of investment.  For example, It was noted that although had the EIF has been 
approached in the past by SWFs about investing in their FoF programme, the negotiations had not 
proceeded because the target IRR / multiples are below the level that was viewed as commercially 
acceptable. 

56 European VC: Myths and Facts - Dr. Ulf Axelson and Mr. Milan Martinovic, London School of Economics 

28 

 
 
 
 
 
 
                                                           
Policy context & mapping existing provision 

There  is  some  evidence  that  since  the  US  market  has  just  achieved  a  record-breaking  year  for 
capital- raising, both for PE overall and for VC that the market  in the US may be becoming over-
saturated  on  the  supply  side,  which  could lead  to more  constrained  returns.  This might  help to 
attract  international  investors  to  European  VC,  since  there  is  less  capital  chasing  the  potential 
rewards from outsized exits. 

2.2.2.5  Geographic fragmentation and concentration of the VC market in Europe 

Caution is needed in referring to a single or homogenous “European” venture capital market. The 
EU consists of 28 different Member States and there is evidence of geographical dispersal and over-
fragmentation of the market, but conversely also of concentration in particular counties and cities 
where VC hubs are thriving, such as London, Paris, Berlin and Stockholm.  

Rather,  VC activity is highly concentrated in a few  European countries.  Moreover,  VC in Europe 
tends  to  be  clustered  in  major  cities  where  VC  markets  are  more  mature  (e.g.)  rather  than 
uniformly spread across all EU regions or countries. 

Direct comparisons with the VC in the US therefore need to be interpreted with caution, since the 
US  VC  industry  is  heavily  geographically  concentrated  in  California/  Silicon  Valley  and 
Massachusetts57. These together, account for over 50% of all VC activity. Texas and New York are 
also important States for US VC, New York being a major tech hub. 

The table below sets out the relative percentage shares of funds raised for VC by geographic region 
in Europe.   

Table  9  -  VC  fundraising  -  sources  of  funds  for  EU-based  VC  funds,  breakdown  by  geographic 
market 

Region 

FR&BNLX 
NA 
UK&I 
DACH 
Nordics 
SE 
EU 
unclassified 
CEE 

VC  Fundraising 
geographic 
breakdown% 

2013 

2014 

Countries 

43.6 
11.8 
19.5 
9.6 
7.9 
3.5 
0.6 

46.1  France, Belgium, Luxembourg, Netherlands 
12.6  North America 
10.2  UK and Ireland 

8.4  Germany, Austria and Switzerland 
8.4  Norway, Sweden, Denmark and Finland 
6.8  Portugal, Spain, Italy, Greece 
6.1 

1 

0.9  Estonia, Latvia, Lithuania, Poland, Hungary, Romania, Ukraine, 

Bulgaria, Serbia, Albania, etc. 

2.4 
AA 
RoW 
0.1 
Source: Invest Europe, 2014 European Private Equity Activity 

0.2  Asia, Australia 
0.3  Rest of the world 

The wide disparities suggest that the rationale for intervention should explicitly bear this  in mind, 
and that the implications of options should also be considered in terms of regional impacts. 

57 https://www.cbinsights.com/research-venture-capital-q1-2015  

29 

 
 
 
 
 
 
  
                                                           
Policy context & mapping existing provision 

The number of deals also varies considerably. In the second quarter of 2015, the UK had the highest 
numbers of VC dals (89), but France was not far behind, with 82. Germany was a distant third with 
46  deals.58  Other  EU  countries  had  significantly  fewer  deals.  The  wide  disparity  between  different 
parts of Europe suggests that the rationale for intervention should explicitly bear this in mind, and 
that implications of options should also be considered in terms of regional impacts.   

Recent data points to a strong recovery in the European VC asset class, albeit at a low level. Based on 
Dow Jones Venture Source and VentureWire data, the amount invested in European start-ups rose 
from €6.35 billion in 2013 to €8.29 billion in 2014, and to €5.77 in the first two quarters of 2015.59 
However, this was largely driven by investment in growth stage and buy-outs, reiterating the point 
that supply is fragile for seed and early-stage start-ups and vulnerable to economic fluctuations. 

Figure 13 - Comparison between VC fundraising and investments in the EU and US. 

US, EU VC fundraising and investments 

O
R
U
E
n
o

i
l
l
i

M

 30.000

 20.000

 10.000

 -

2002

2003

2004

2005

2006

2007

2008

2009

2010

2011

US VC fundraising

EU VC fundraising

EU VC-investments

US VC-investments

Source: Invest Europe and Thomsonone (Invest Europe  data prior to 2007 are not available) 

The extent of cross-border venture capital in Europe is limited. The provision of cross-border VC is 
constrained by obstacles such as different regulatory and taxation regimes, legal uncertainty as to 
mutual recognition principles when money is repatriated following exit. The state of maturity of 
the VC market in individual Member States varies significantly. A small number of Member States 
have a vibrant venture capital industry, whilst other Member States have little VC provision. 

Figure 14 - Venture capital trends, Index 2007 = 100 

Source: Entrepreneurship at a Glance, OECD, 2014 (c.f. pp 90-91) 

58 http://pevc.dowjones.com/Article?an=DJFVW00120150727eb7rapetw&cid=&ctype=&from=Search 
59 http://blogs.wsj.com/venturecapital/2015/07/27/the-daily-startup-vc-investment-in-european-startups-accelerates/ 

30 

 
 
 
 
 
 
 
 
                                                           
 
 
Policy context & mapping existing provision 

Some Member States have set up dedicated legal regimes for VC which set out rules on portfolio 
composition, investment techniques and eligible investment targets. The UK and the Netherlands 
have introduced favourable tax treatment for VC investments, at least for individuals. However, 
most Member States do not have specific VC legal regimes, and instead apply general rules on 
company law and prospectus obligations to the activities of all fund managers who wish to offer 
'private placements' of venture capital within their jurisdictions.  

Tax incentives are also widely used in some Member States to stimulate the supply side of venture 
capital,  for  instance,  through  R&D  tax  credits  and  others  specific  instruments,  such  as  Enterprise 
Investment  Schemes  (EIS)  and  Venture  Capital  Trusts  (VCTs)  in  the  UK,  and  similar  schemes  in 
France. 

As an example of the nature and extent of geographic differences, the table below summarises the 
average amount raised in 2010-2014 across 6 European regions at four investment stages: 

Table 10 – Average amount raised 2010-2014 at 4 investment stages – geographic disparities60 

EU region 

Seed (in €’000) 

Start-up (in 
€’000) 

Later Stage (in 
€’000) 

Growth (in €’000) 

Central & 
Eastern Europe  
DACH61  
France & 
Benelux  
Nordics  
Southern 
Europe  
UK & Ireland  
EU average 

221,000 
292,000 

466,000 
300,000 

811,000 
608,000 
357,000 

808,000 
1,490,000 

1,742,000 
1,018,000 

1,113,000 
2,090,000 
1,458,000 

1,238,000 
1,644,000 

2,536,000 
2,286,000 

1,889,000 
4,019,000 
2,341,000 

5,062,000 
5,047,000 

7,420,000 
6,959,000 

6,433,000 
11,489,000 
7,164,000 

Source: Invest Europe. Note - includes VC funding, but excludes funding from “other sources”, such 
as friends and families, and business angels, which previous research suggests can be significant.   

As the table shows, firms in the UK and Ireland receive by far the highest amount on average across 
all investment stages, considerably higher than the EU average. Central and Eastern European firms 
lag  behind  furthest  at  the  seed  and  start-up  stages.  However,  differences  are  somewhat  less 
pronounced at the later stage. However, they are still significant. A typical growth investment stage 
fundraising  is  circa  €11.5  million  in  the  UK  compared  with  less  than  half  that  (€5.06  million)  in 
Central & Eastern Europe.   

Many private investors / Limited Partners (LPs) no longer invest in the European VC asset class.  

This is due to the higher risk associated with investing in start-up and early-stage growth firms and 
poor returns has deterred the private sector from returning to the asset class. The following figure 
based on Invest Europe data shows the extent to which the public sector has replaced the private 
sector  in  the  provision  of  risk  capital  finance  (moving  from  a  7%  share  to  a  30%  share  of  total 
funding). 

Further supporting data and analysis in respect of key trends and developments in respect of the 
European Venture Capital asset class - including – is provided in Appendix C. Appendix E provides 
performance data on the asset class. Invest Europe  data only represents the activity of VC funds, 

60 Based on data supplied by Invest Europe   for this study 
61 Germany, Austria, Switzerland 

31 

 
 
 
 
 
 
                                                           
Policy context & mapping existing provision 

while there are other sources of seed and early-stage investment, notably from the EIF and other 
public sources, and from angel investors and syndicates.   

2.2.2.6  The role of wider alternative asset classes (business angels and crowdfunding) 

According  to  EBAN,  business  angel  activity  accounts  for  a  greater  share  of  the  seed  and  early 
stage market than VC capital. In 2014, the total European early-stage investment market including 
angel  investment  was  estimated  to  be  worth  7.5  billion  EUR  per  annum,  according  to  the  EBAN 
Statistics  Compendium.  Business  angels  represented  the  biggest  share  of  the  investment  market 
with  5.5  billion  EUR  of  (cumulative)  investment,  followed  by  the  venture  capital  industry  which 
invested 2 billion euros (or €3.6 billion according to Invest Europe data) in seed and early stage VC.   

A  distinction  is  needed  between  the  visible  and  non-visible  angel  markets.  Previous  studies  have 
shown  that  the  non-visible  market  may  be  up  to  several  times  the  size  of  the  visible  market.  It 
should be  noted that there  are tax incentives available to angels which play an important  role in 
attracting investment from high net worth individuals.  

Equity-based crowdfunding is still marginal as a proportion of total equity finance, but is 
becoming growingly important.  EBAN estimated by the size of crowdfunding to be 80m EUR 
According to a 2015 published report on alternative finance62, equity-based crowdfunding grew to 
€82.56m in 2014 and is expected to grow in future. 

Whilst  many  VCs  exited  the  market,  those  that  remain  generate  higher  investment  returns, 
benefiting  from  access  to  high  quality  deal  flow.  Individual  investors  (high  net  worth  individuals, 
angels)  account  for  a  disproportionate  share  of  the  market  relative  to  their  share  of  other  asset 
classes,  reflecting  their  longer  term  approach.  EBAN  estimates  that  funds  raised  by  businesses 
angels, and by other investors, amounted to between €4 billion and €5 billion in 2011-2013.  

Table  11  Funds  raised  by  Business  Angels  and  informal  investors  in  early-stage  investment  (€ 
million)  

Year 

Angel networks (formal) 
Visible % 
Total (visible and invisible) 

Source: EBAN 

2011 
(€m) 

2012 
(€m) 

2013 
(€m) 

427 
9 
4317 

509 
10 
4590 

554 
10 
4989 

Data  on  formal  angel  networks  has  been  formally  reported  through  national  business  angel 
associations.  However,  the  estimates  of  the  size  of  the  angel  market  are  largely  based  on 
speculative  assumptions  about  the  scale  of  the  invisible  market,  the  data  should  be  interpreted 
with caution.  

Early-stage investment in Europe might amount to €6.5 billion per annum (i.e. the sums of the two 
previous  tables  combined).  Of  this,  somewhat  less  than  40%  comes  from  formal  funds.  The  data 
suggests that the majority of European seed and early-stage funding comes from informal investors 
and business angels.  In terms of the level of returns on business angel financing, Wiltbank (2009) 
did some work for NESTA63 in the UK which the BA industry found were over-estimates of the actual 
returns. EBAN also estimates that some €80 million has been raised by crowdfunding. According to 

62www.ey.com/Publication/vwLUAssets/EY-and-university-of-cambridge/$FILE/EY-cambridge-alternative-finance-
report.pdf 
63 NESTA Research report: May 2009. Siding with the Angels - Business angel investing – promising 
outcomes and effective strategies, Robert E. Wiltbank 

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Policy context & mapping existing provision 

a  2015  published  report  on  alternative  finance64,  equity-based  crowdfunding  grew  to  €82.56m  in 
2014.  

2.2.2.7  Supply-side baseline situation – summary of key problem drivers 

In summary, the main findings from the analysis of the baseline situation were that:  

 

Invest Europe and other data shows that there is evidence of the market overshooting during 
upturns  and  downturns  leading  to  an  under-supply  of  VC  during  economic  downturns  and 
conversely oversupply leading to poor investment returns during periods of economic boom.  

  This  suggests  that  there  is  consequently  a  need  for  the  public  sector  to  ensure  that  market 
shock driven and cyclical economic fluctuations do not hamper innovative start-ups and SMEs’ 
ability to access equity start-up, early-stage, growth and expansion capital.  

Other characteristics relating to the size and structure of the VC industry are now considered: 

  European VC funds are on average small compared with their US competitors. Consequently, 
institutional investors and large pension funds are deterred from investing in the European VC 
asset class due to the small ticket size which is often below the minimum level at which is viable 
for them to invest (€10m - €25m).  

 

In principle, larger VC funds generate better returns.65 Although larger-scale VC funds would 
help  to  overcome  structural  weaknesses  within  the  market,  there  is  a  trade-off  between  VC 
fund size and performance. The research found that if individual VC funds become too big, their 
relative performance may decline, especially if they are investing in sectors where the total size 
of the market is relatively small.  

  There  is  a  lack  of  transparency  in  the  European  VC  market  with  many  VC  funds  lacking  an 
extended track record and reporting inadequately on their activities and performance of their 
investments.  While  Invest  Europe  has  introduced  a  Code  of  Conduct  and  self-regulatory 
reporting standards66, these have not (yet) been implemented widely in the industry. 

64www.ey.com/Publication/vwLUAssets/EY-and-university-of-cambridge/$FILE/EY-cambridge-alternative-finance-
report.pdf 
65 See, for example, BCG & IESE. 2015. A Rise in Good Deals, but an Investor Drought. P. 8 
66  See,  for  example,  EVCA  Special  Paper  2007,  p.  37:  http://www.evca.eu/media/78722/guide-on-private-equity-and-
venture-capital-2007.pdf  

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Policy context & mapping existing provision 

  The  European  VC  industry  is  highly  fragmented  and  spread  across  different  geographies. 
Whereas  in  the  US,  there  is  a  high  level  of  concentration  of  VC  activity,  there  is  wide 
heterogeneity across EU28 in terms of the state  of maturation of  the VC market, market  size 
and structure and the scope for exits.  

  There are wide variations in the state of development of the European VC asset class across 
different EU countries. A disproportionate level of seed and early-stage VC activity – and equity 
financing supply - is concentrated in a small number of Member States. This includes the UK, 
France and Germany, Scandinavia and to a lesser extent Italy and Spain.  

  The  infrastructure  for  the  VC  ecosystem  is  much  less  developed  in  some  of  the  newer 
Member  States.  Although  there  are  emerging  fund  managers  (GPs),  the  investor  base  lacks 
depth,  the  private  sector  as  investors  (e.g.  LPs)  are  generally  absent  and  to  achieve  fund 
closure, GPs have to rely on EIF and / or other public sector support. 

  The  extent  to  which  wide  divergence  in  the  state  of  maturation  of  markets  and  geographic 
concentration of VC activity and deal flow is a problem was questioned by some stakeholders. It 
was argued that further concentration of the European VC sector in regional hubs (e.g. London, 
Berlin)  capable  of  competing  globally  could  be  positive  since  VC  activity  in  the  US  is  also 
concentrated.    However,  other  stakeholders  disagreed  and  saw  scope  to  strengthen  the 
European VC ecosystem across all investment stages, given the importance of equity capital in 
accelerating the development of high-growth SMEs across the equity lifecycle. 

  Because  of  the  high  level  of  fragmentation  and  small  average  size  of  VC  funds,  challenges  in 
attracting  investment  to  the  European  VC  asset  class.  A  key  opportunity  cost  for  Europe  is 
missing out on accessing international pools of capital. Many large investment funds (LPs) have 
a minimum ticket size of €25m  - €50m.  Given that investments in any individual VC fund (or 
FoF)  should  not  exceed  10%  of  total  fund  size,  this  would  be  too  large  to  invest  in  most 
European VC funds, and possibly  prohibitive  even at the individual FoF level, unless each FoF 
was of sufficient scale (alternatively a Direct Investment Vehicle structure could be set up).  

  Many  private  investors  remain  wary  of  the  European  VC  asset  class  because  of  historical 
under-performance.  Public  pension  funds  in  some  countries  (e.g.  Sweden)  are  no  longer 
allowed  to  invest  in  VC  because  of  the  low  returns.  Private  pension  funds  and  institutional 
investors remain largely absent  from the market.  LPs instead attract  investment  from private 
equity  groups,  high  net  worth  individuals  and  from  the  EIF  and  other  public  investors  at 
national and regional level. 

 

Invest  Europe  data  shows  that  many  private  sector  players  exited  the  market  in  the  early 
2000s. Despite some evidence of improving performance linked to cyclical recovery, many have 
still not returned to the asset class.  

  However,  the  situation  for  VC  overall  may  be  beginning  to  recover  from  the  economic  and 
financial crisis: in 2014, data67 shows that 40% of the funds raised from institutional investors 
came from outside Europe. This suggests that awareness about improved performance returns 
in the European VC asset class in the past 2-3 years have begun to impact investor behaviour. 

67 Invest Europe - 2014 European Equity Activity. Statistics on Fundraising, Investments & Divestments. P. 6 

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Policy context & mapping existing provision 

  Some  investment,  notably  by  individual  investors,  is  tax-driven.  There  are  different  tax 
treatments between Member  States  and between different  types of investors (individual and 
corporate)  with  the  most  generous  tax  incentives  being  given  to  individual  investors  in  some 
Member States. 

  The  public sector continues  to  account  for  a  high  percentage  of  the  seed  and  European  VC 
market.  According to the latest data68, government agencies accounted for 30% of new funds 
raised in 2014, and fund of funds for a further 7.7% which includes EIF investment. 

  There is a lack of cross-border provision of venture capital. Although some progress has been 
made  to  improve  the  situation,  for  instance,  through  the  adoption  of  a  new  regulatory 
framework  for  cross-border  venture  capital  and  the  EuVECA  designation,  the  extent of cross-
border investment in VC remains limited. 

  However, there are examples of increased cross-border activity and the structuring of FoF to 
encourage  multi-country  VC  investment  flows.  For  instance,  the  EIF  and  national  financing 
agencies set up the Baltic Innovation Fund in the 3 Baltic States in 2013. Larger private equity 
groups investing in VC usually adopt a multi-country approach in order to diversify risks. 

  There were mixed views on the extent to which the low level of provision of cross-border VC 
is a problem. Although increasing the critical mass of FoF and VC funds to attract international 
capital through larger ticket size implies greater cross-border cooperation, most underlying VC 
managers favour proximity to investments in start-ups and SMEs in order to be able to nurture 
their accelerated growth. This links to an earlier point that seed (including angel activity) and 
early-stage  VC  investment  goes  beyond  access  to  capital  and  is  concerned  with  strategic 
advisory  support,  access  to  networks  of  contacts,  and  ensuring  the  availability  of  follow-on 
financing.  

 

In  some  larger  EU  countries,  such  as  the  UK,  France  and  Germany, the  private  sector  has  15 
years’+ experience in operating in the VC industry and a well-developed VC eco-system. 

  Conversely, in most other EU countries, there is a lack of private sector VC infrastructure and 
technical  capacity  at  the  level  of  GPs  (fund  managers)  and  low  levels  of  awareness  among 
investors (LPs), especially in EU13 countries i.e. the relatively new Member States69.  

2.2.2.8  Challenges in attracting international investors to European VC  

The  main  challenges  and  barriers  in  attracting  larger  (especially  international)  investors  to  the 
European VC asset class are now examined.  

From  an  investor  perspective,  the  lack  of  sufficient  scale  of  individual  VC  funds  in  Europe  is  a 
major problem, since many LPs, pension funds and institutional investors require a minimum ticket 
size of €25 million (possibly as high as €50 or €100 million for Sovereign Wealth Funds (SWFs) and 
the largest LPs).  A further challenge (as noted in the section on performance and returns) is that 
SWFs  demand  higher  commercial  returns  than  are  usually  possible  in  a  publicly  backed  FoF 
structure, where commercial considerations compete with public policy objectives. 

68 Invest Europe Yearbook, 2015 
69 A case study on the EBRD’s Integrated Support Programme in the Baltic States highlights the importance of raising the 
visibility  and  attractiveness  of  VC  as  an  asset  class  among  investors  through  capacity-building  and  awareness-raising 
events (see Appendix B). 

35 

 
 
 
 
 
 
 
                                                           
Policy context & mapping existing provision 

There  are  major  barriers  in  attracting  international  investors  due  to  the  maximum  ticket  size  in 
European  VC  funds  being  below  the  level  at  which  larger  investors  will  commit  funding.  Risk 
management  demands  that  large  investors  do  not  invest  more  than  10%  of  their  total  capital 
allocation to a particular asset class within any given FoF or underlying VC fund. This implies that 
the minimum critical mass for a VC fund to attract investment from larger international investors is 
250m€ (€25m ticket size 10% maximum investment in total fund size). 

A further challenge relates to the lack of diversity of different types of investors within European 
VC  and  in  particular  the  lack  of  private  investment,  makes  it  more  difficult  to  achieve  funding 
closure within a reasonable timeframe. In contrast, in the US, there are a wider range of sources of 
funding  and  diversity  among  potential  LPs  in  the  US  compared  with  Europe,  such  as  FOs, 
endowments, HNWIs and institutional investors.   

The time taken to achieve first closure in the US for VC funds is shorter than in Europe. This can 
be as short as 3-4 months, even for a new VC manager Interviewees argued that this reflects the 
fact that there are a wider range of sources of funding and diversity among potential LPs in the US 
compared with Europe, such as FOs, endowments, HNWIs and institutional investors.   

An illustration of the quicker speed of fundraising in the US is outlined in the following table:  

Table 12 - Accelerated fundraising timeframes in the US  

Homebrew Venture Capital Fund – first-time fund manager:  

~40 initial emails all via warm introductions to investors familiar with early-stage tech 

~20 of which converted into phone calls or meetings 

10 of those 20 turned into multiple conversations 

5 said yes within the timeframe, of which four became part of the fund. 

The timeline is now outlined:  

 

January 2013: Homebrew starts fundraising from institutional LPs 

  March 2013: First lead institutional commitment secured 

  April 2013: terms are agreed with three other institutional LPs, several smaller LPs and a few 
individuals. The four lead institutions contributed ~92% of the fund and the other investors 
rounded out the total. 

Source - http://hunterwalk.com/2013/07/22/homebrew-100-days-of-fundraising/  

In  comparison,  it  can  take  between  12-18  months  to  achieve  first  fund  closure  in  Europe.  First-
time fund managers may find it particularly challenging to raise funding.   

The  additional  timeframes  required  in  undertaking  fundraising  in  Europe  to  achieve  fund  closure 
are  a  factor  that  should  be  reflected  in  the  finalization  of  the  design  of  the  FoF  programme. 
Individual FoF will need to be given sufficient time to raise capital. Experience from VCAP suggests 
that it takes time to build sufficient momentum.  

36 

 
 
 
 
 
 
Policy context & mapping existing provision 

The  table  below  shows  how  the  early-stage  VC  asset  class  currently  is  at  least  as  attractive  in 
investors’ considerations and how this should be improved to rank 10 out of 15 by spreading risk 
with  the  help  of  a  FoF.  As  of  2013  the  performance  ranking  by  stages  and  geographical  location 
based on a five-year horizon IRR was as follows: US buyouts (13.52%), European buyouts (9.63%), 
US venture (5.86%), and European venture (1.32%).70 

Table 13 – International investors’ level of interest in the private equity asset class71 

Large buyout 

Mid-Market 

Small Buyout 

Turnaround 

US 

14 

7 

2 

5 

EU 

13 

6 

1 

4 

Asia 

12 

8 

3 

n/a 

Lastly, the results from the set-up of a pan-EU FoF should create positive longer term impacts for 
the European economy. The types of impacts expected include: higher levels of participation by the 
private sector in the European VC asset class, making it more attractive relative to alternative asset 
classes  and  geographies  (e.g.  vs.  Asia,  the  US  and  Australia),  accelerating  jobs  and  growth  in 
innovative “gazelles” and supporting European innovation, a key competitiveness driver. 

If the new instrument were multi-investment stage, this would help the EU to capture the upside 
potential benefits – on the economy as whole, employment and innovation. Europe currently often 
“loses  out”  since  at  the  point  when  high-growth  firms  have  greatest  upside  potential,  they often 
relocate  to  the  US  since  it  is  easier  to  raise  expansion  funding  in  the  US  than  in  Europe.    Some 
stakeholders  also  pointed  out  that  there  are  other  framework  conditions  that  influence  the 
decision of European gazelles in relocating to the US, such as closer proximity to clients in the tech 
area,  a  more  robust  IPO  market  and  more  attractive  taxation  and  incentives  structures  for 
entrepreneurs. 

2.3  Definition of policy objectives 

EU research and innovation (R&I) policy emphasises the importance of supporting innovative SMEs 
with  high-growth  and  internationalisation  potential  through  a  number  of  policy  instruments  (e.g. 
RTD  funding,  pilot  schemes  to  promote  technology  transfer,  promoting  access  to  innovative 
finance).   

More broadly, there are well-established EU policies relating to strengthening access to finance for 
SMEs  in  general  so  as  to  facilitate  the  growth  and  development  of  start-ups  and  SMEs.  These 
objectives  should  collectively  contribute  to  the  achievement  of  the  aims  of  the  Europe  2020 
strategy of smart and sustainable growth. The EU “aims to make the European venture capital (VC) 
industry  more  self-sustainable  and  globally  competitive  by  reducing  its  dependence  on  the  public 
sector  and  encouraging  more  investment  from  institutional  and  private  sources  back  into  VC, 
especially into early and growth-stage funds”72.  

During the course of the study, DG RTD has further elaborated on the above objectives regarding 
venture capital in the EU. In summary, these are to: 

70  EVCA.  2013.  Pan-European  private  equity  performance  benchmarks.  Global  comparisons  of  VC  investment  returns 
across geographies 
71 Initial numbers based on EVCA position statement Nov 14. P. 7 
72 Source - European Commission’s DG RTD - terms of reference for this study 

37 

 
 
 
 
 
 
 
                                                           
Policy context & mapping existing provision 

 

improve the supply of, and access to, seed and venture capital for firms undertaking R&I; 

  maintain an adequate supply of risk capital finance for start-ups and SMEs during the economic 
cycle to avoid cyclical-related fluctuations and variations in the availability of funding supply; 

  encourage more investments from institutional and private sources back into VC, especially into 

early and growth-stage funds that invest in firms undertaking R&I; 

  encourage the creation (i.e. new market entrants) or expansion of both funds and FoF across 

Europe. 

 

increase  the  average  size  of  VC  funds,  given  that  lack  of  critical  mass  is  a  major  challenge  in 
attracting international capital. 

  ensure that if a FoF programme were to be set up, this should not take place in isolation, but 
should  rather  be  embedded  as  part  of  a  package  of  support  measures,  to  include  technical 
capacity-building measures73.  

In  order  to  determine  which  policy  option  is  most  appropriate,  it  is  necessary  to  identify  and 
analyse  how  far  each  of  the  above  policy  objectives  would  be  likely  to  be  achieved  under  the 
different options and sub-options spelt out in detail in Section 5.2. This in turn should influence the 
assessment  of  policy  options  and  the  identification  of  a  preferred  option.  Were  a  pan-European 
fund  of  funds  approach  to  be  adopted,  the  objectives  will  also  inform  the  development  of  the 
suggested configuration (set-up, operation, exit mechanisms and the approach to returns) of a fund 
of funds (or FoF programme).   

The objectives defined by the European Commission for a possible future initiative will determine 
for  instance  whether  the  FoF  should  have  a  sectoral  or  generalist  focus,  the  geographic  scope, 
whether incentives should be included to encourage fund managers to invest in markets where VC 
is less well developed, the optimal size of a FoF, the investment strategy and investment criteria, 
etc.

73  Any  intervention  by  the  EU  led  by  the  European  Commission  must  help  to  foster  the  experience  of  those  operating 
funds and funds of funds. At the minimum, any new initiative should not undermine the acquisition of such skills, which 
appear to have a large element of "learning by doing". 

38 

 
 
 
 
 
 
                                                           
Policy context & mapping existing provision 

2.4 

Intervention logic  

In the following diagram, the basic intervention logic is set out. 

Figure 15 - Intervention logic – a pan-European fund of funds 

All public interventions start with the identification of the problems and needs that the intervention 
would address i.e. the identification of the baseline scenario and underlying rationale. In this study, 
among the assumptions are those: 

 

 

Innovative  SMEs  need  access  to  equity  capital  in  order  to  promote  an  accelerated 
development trajectory, and to help them to achieve sufficient scale and to internationalise.  
Innovative SMEs make a valuable contribution to boosting economic growth and jobs in the 
EU.  SMEs  contribute  more  than  half  of  the  total  value  added  in  the  non-financial  business 
economy and provided 80% of all new jobs in Europe in the past five years.74  

  At the same time, start-ups and SMEs experience difficulties in accessing finance to fund the 
start-up phase, and their growth and expansion. It is therefore necessary for the public sector 
to monitor financing supply and to intervene where necessary to ensure that there is adequate 
access to finance in general, and to risk capital financing in particular. 

74 Structural Business Statistics (Eurostat) 

39 

 
 
 
 
 
 
 
                                                           
Policy context & mapping existing provision 

  Successive  rounds  of  equity  financing  enable  technology  and  science-based  based  SMEs  to 
significantly scale up their activities prior to achieving breakeven point.   This is crucial given 
the employment and potential of high-tech new and emerging sectors. Conventional sources of 
financing  would  not  allow  them  to  scale  up  their  activities  and  to  internationalise  before 
breakeven.  

 

Innovative  SMEs  generate  a  disproportionate  share  of  employment,  economic  growth  and 
wealth  creation  through  for  instance,  the  development  of  breakthrough  and  disruptive 
technologies and innovations.   

Although there is evidence of significant publicly backed intervention to maintain the supply of 
finance to innovative start-ups and SMEs, there remain areas of structural market failure. 

Many private sector investors (LPs) have withdrawn from the European VC asset class, due to poor 
performance  returns,  and  an  over-supply  of  equity  funding  concentrated  in  a  small  number  of 
sectors (e.g. ICT, technology-oriented, clean-tech), which exacerbated the problem. 

The  economic  and  financial  crisis,  and  the  subsequent  sovereign  debt  crisis,  worsened  the 
situation,  since  performance  returns  diminished  still  further,  with  difficulties  in  achieving 
successful exits and a significant countercyclical reduction in the level of VC activity.  Moreover, 
the introduction of more stringent EU regulation (e.g. Solvency II, Basel III, AIFMD) on investing in 
private  equity  and  in  alternative  asset  classes  has  deterred  private  investors  from  returning. 
Another  factor  that  has  limited  the  scale  of  investment  is  greater  risk  aversion  among  investors, 
especially institutional investors and pension funds. 

Many fund managers (GPs) have also withdrawn from  the European venture capital asset class 
since the early 2000s. Fund managers have found the additional fees associated with FoF structures 
difficult  to  justify  given  under-performance  of  European  (and  global)  VC  as  an  asset  class  until 
recently.  

To  address  structural  problems  within  the  market,  notably  market  failures  at  particular 
investment  stages,  the  EIF  and  other  public  authorities  at  national  and  regional  levels  have 
intervened.  Significant  public  sector  investment  has  been  made,  as  demonstrated  in  the  Invest 
Europe      figures  on the  share of  the  European  VC market that  is  dependent  on  the  public  sector 
(circa 45% in 2013). 

Framework conditions - insufficient critical mass to attract international capital, regulatory regime 
onerous, no fiscal incentives for institutional investors and over-fragmentation of the market. 

The rationale for setting up a pan-European FoF is that it would complement existing financial 
instruments at EU and MS level led by both the public and private sectors, and address outstanding 
market failures in the VC sector. The main areas of market failure were analysed in Section 2.1.2 
(demand and supply side analysis). A summary is provided in the table on the following page by 
way of reminder: 

40 

 
 
 
 
 
 
Policy context & mapping existing provision 

Table 14 – Summary of market failures 

Structural market failures 

  Led  by  the  EIF,  but  with  national  fund  of  funds  operators  also  playing  an  important  role,  the  public 
sector  dominates  the  European  VC  asset  class.  Whilst  this  is  sustainable  in  the  short-medium  term, 
ideally the private sector would be attracted back to the asset class. 

  European  fund  of  funds  –  and  the  underlying  VC  funds  themselves  –  suffer  from  the  problems  of 
insufficient  mass  and  over-fragmentation.    To  attract  international  capital  into  the  asset  class  will 
require significantly bigger average ticket sizes (€25m at the VC level and circa €50m at the FoF level). 

  Performance returns are insufficiently high to attract the private sector back to the asset class. Pension 
funds  and  institutional  investors  appear  especially  reluctant  to  invest,  with  some  exceptions  (e.g. 
Portuguese FoF EIF-backed with the support of pension funds).  

Market failures by investment stage.  

  Another aspect of market failure is the extent to which there are funding gaps at particular stages of 

the start-up and SME equity financing lifecycle.  

  Whilst seed capital and early-stage has historically been a clear area of market failure (lower returns, 
higher  risks),  there  have  been  a  lot  of  public  interventions  in  this  marketspace  (e.g.  BPIFrance  was 
asked to manage a €600m seed capital fund by the French government.  

  Although the private sector is especially interested in investing in later stage expansion funding and in 
management buy-outs, compared with the US, there remains a gap in later stage funding from €5m to 
€15m. 

The interview feedback found that although the private sector is especially interested in investing in 
later stage expansion funding and in management buy-outs, compared with the US, there remains a 
gap in later stage funding from €5m to €15m.  Whilst  from  a public policy perspective,  there  has 
been  less  focus  on  this  area  of  the  market  in  the  past,  this  is  an  area  where  the  EU  faces  a 
considerable  potential  loss  of economic output  through  employment  and  turnover  growth  in  VC-
assisted high-growth SMEs. During the expansion phase, many European high-growth firms relocate 
to the US for a number of reasons. First, in relation to access to funding, during Series B, C and D 
funding rounds in the US, approximately 2.5 times the amount of capital was raised that could have 
been raised through carrying out an equivalent equity capital raise in Europe.  

Secondly, there are a range of non-financial reasons why European high-growth firms may relocate 
to the US, such as a desire to be in closer proximity to their clients (especially in the ICT sector), and 
achieving a step-change in their development and scale in order to internationalise.  A number of 
interviewees  in  private  equity  fund  of  funds  and  VC  funds  stated  that  they  had  had  to  exit 
successful investments earlier than they would otherwise have liked since later stage investors from 
the US had insisted that either the whole firm, or at least entire teams of people from tech-firms 
relocated. 

41 

 
 
 
 
 
 
 
Policy context & mapping existing provision 

The  definition  of  objectives  is  closely  linked  to  the  issues  of  relevance  and  coherence.    A  future 
possible intervention has to be relevant in addressing the identified needs and problems identified 
above. The objectives of such an intervention would be several fold. The objective would firstly be 
to provide sufficient incentives to attract the private sector back to the European VC asset class and 
to reduce the dependence of SMEs on public sector equity investment.  Secondly, a key objective 
would be to strengthen the supply of seed, venture capital and growth phase capital to innovative, 
high-growth  SMEs.  A  third  objective  would  be  to  use  public  sector  investment  to  generate 
additional leverage at both the FoF level and through the underlying funds by at the minimum level 
securing match funding from the private sector by attracting investors at the FoF level rather than 
achieving leverage through investment in the underlying funds alone (as is generally the case with 
EIF FoF).  

This would be relevant in the context of the 2015 Regulation on the European Fund for Strategic 
Investments  (EFSI)75,  which  places  a  strong  emphasis  on  achieving  public  sector  leverage.  EFSI 
envisages using €21bn of new money in order to generate €315bn in investment, a leverage effect 
of 15:1. This initiative can also be viewed in the wider context of the Capital Markets Union that is 
currently under development. By fostering cross-border VC in Europe, this initiative may contribute 
to a more united European Single Market for financial products and services. 

In relation to coherence, a key consideration is how a VC FoF instrument could be  differentiated 
from  existing  provision  (e.g.  FoF  established  by  national operators,  the  EIF  and  by  private  sector 
equity players) and whether an additional mechanism would complement or conversely duplicate 
existing publicly  backed FoF. Also of relevance  in terms of understanding existing provision is the 
mapping exercise undertaken to identify current EU equity-based risk capital financing instruments 
(see Section 2.4 – EU funding for innovative financial instruments). The research found that in both 
the  2007-2013  and  2014-2020  programming  period,  there  are  already  a  number  of  financial 
Innovative  SME  Facility  (GIF)76  within  the 
instruments,  such  as  the  High  Growth  and 
Entrepreneurship and Innovation Programme (EIP) and in the current period, the Single EU Equity 
Financial  Instrument  supports  European  enterprises’  growth,  research  and  innovation  (R&I)  from 
the early-stage,  including seed, through to expansion and growth stage capital, which are  funded 
through H2020 and COSME. 

Although considerable existing (public) provision has been identified, it remains the case that the 
private sector is under-represented in the European VC asset class, which raises sustainability issues 
over  the  medium  and  longer  term.  There  are  moreover  concerns  about  the  EIF’s  role  and  the 
danger  of  an  over-concentration  of  seed  and  early-stage  VC  market  in  the  hands  of  a  single 
European public institutional actor. It is imperative that a possible future pan-European VC FoF is 
differentiated  from  existing  provision.  One  way  in  which  this  achieved  is  if  the  FoF  were  to  be 
managed by the private sector in order to attract the private sector back to the European VC asset 
class. Further details as to the way in which a VC FoF established by the European Commission’s DG 
RTD could potentially differentiate itself is summarised in Section 4 (options analysis).  

In order to set up a VC FoF, human resources would need to be allocated by the EC or an entrusted 
entity  (inputs)  to  oversee  the  set-up  of  such  a  FoF  and  once  established,  to  monitor  the 
management,  implementation  and  performance  of  the  FoF  to  ensure  transparency  and  good 
governance. However,  it was  emphasised that given that achieving positive  performance through 
underlying investments under a FoF model takes considerable time, the EC will need to recognise 
its  operations. 
the  typical  J-curve  performance  of  a  FoF  during  the  first  10  years  of 

75 Regulation (EU) 2015/1017 of 25 June 2015 on the European Fund for Strategic Investments 
76 The GIF was operated by the EIF on behalf of the EC, and aims to increase the supply of equity for innovative SMEs in 
their early-stages (GIF1) and in the expansion phase (GIF2). Investment proposals by financial intermediaries are selected 
on the basis of an open call for expression of interest, 11 projects have been allocated a budget of 550 million EUR. 

42 

 
 
 
 
 
 
                                                           
Policy context & mapping existing provision 

Stakeholders interviewed also stressed that monitoring activities should not extend to interfering 
with  investment  decisions  and  day  to  day  management.  Private  sector  fund  managers  should 
achieve  better  performance  and  higher  rates  of  IRR  (or  investment  multiples  depending  which 
performance measurement tool is used) wherever they are not subject to political or policy-driven 
constraints, and focus on selecting investments in VC funds based on commercial criteria alone. 

There was reluctance among most interviewees to impose geographic and sectoral restrictions on 
EU-supported FoF. This does not however preclude putting in place basic rules on the geographic 
focus of  investments,  since  the  EIF  allows  the flexibility  for  VC  funds  to  invest up  to one-third of 
their funds outside the EU provided they invest two-thirds within the EU. This was viewed as being 
sufficiently flexible. 

Financial  and  human  resource  inputs  can  be  translated  into  processes  which  would  have  to  be 
implemented  under  this  intervention.  A  Call  for  Expression of  Interests  for  a  FoF  manager  would 
first  need to be prepared, which should include  criteria  for selecting FoF managers,  such as track 
record and  experience,  historical  performance,  knowledge  of  high  growth  sectors, etc.   Once  the 
FoF  programme  is  set-up,  the  FoF  manager  appointed  to  run  each  individual  FoF  would  need  to 
identify  VC funds to invest in by reviewing investment  proposals and selecting VC managers. The 
performance  of  these  underlying  funds  would  then  have  to  be  monitored  during  the  investment 
period and finally exit options chosen during the divestment period.  

The  intervention  logic  also  maps  out  causal  chains,  i.e.  the  relationship  between  the  inputs  and 
processes described above and the outcomes that should be achieved. Here, a differentiation can 
be made between the immediate outcomes (outputs), the intermediate outcomes (results) and the 
longer term outcomes (impacts).   

Examples of expected output indicators are the number of VC funds support, and the number of 
investee companies that these VCs in turn invest in. The outputs should then lead to results, such 
as  the  leverage  ratio  achieved  on  initial  EU  funding  as  a  cornerstone  investor  and  growth  in  the 
underlying undertakings that have received funding support. Examples of the types of impacts that 
might be expected are:  

 

Larger average size of VC FoFs and reduced fragmentation. 

  Making the European VC asset class more attractive relative to alternative asset classes.  

  Promotion  of  jobs  and  growth  through  ensuring  access  to  equity  finance  for  innovative 

“gazelles” throughout the equity lifecycle. 

  Higher  growth  in  innovative  European  start-ups  and  SMEs  benefitting  from  staged  equity 

investments (measured in terms of turnover, profitability and employment).   

43 

 
 
 
 
 
 
 
 
 
 
Policy context & mapping existing provision  

3.  POLICY CONTEXT & MAPPING EXISTING PROVISION  

The role of a fund of funds mechanism in enhancing seed and VC supply 

1.  A  venture  capital  FoF  can  be  defined  as  a  FoF  that  makes  equity  investments  in  a  number  of 

different underlying seed and VC funds. 

2. 

In order to address market failures in risk capital provision in Europe, a number of public FoF have 
been set up by the EIF and national FoF operators over the last 15 years. 

3.  A FoF can attract additional private finance, international large ticket investors and help to diversify 
risk  by  investing  in  a  portfolio  of  underlying  VC  funds.  This  should  help  to  maintain  supply  and 
contribute towards increasing the average size of European VC funds. 

EU policy and regulatory framework 

4.  Strengthening access to finance for SMEs in general and of access to equity finance for high-growth 

“gazelles” are important EU policy priorities. 

5.  The  Capital  Markets  Union77  seeks  to  strengthen  the  framework  conditions  for  the  European 
venture  capital  industry.  This  builds  on  the  Small  Business  Act  and  Single  Market  Act  (I  and  II), 
Regulation 345(2013) on European Venture Capital Funds. 

6.  The  Alternative  Investment  Fund  Managers  Directive,  the  Solvency  II  Directive,  and  Basel  III  all 
seek  to  ensure  more  stringent  regulation  of  alternative  forms  of  investment,  albeit  with 
unintended  consequences  in  terms  of  challenges  in  attracting  private  institutional  investment  in 
European VC. 

Existing provision of equity financing instruments to support innovative start-ups and SMEs in Europe 

7.  The EU provides significant support to innovative SMEs through existing equity instruments e.g. in 
2014-2020, through the Single European Financial Equity Instrument under Horizon 2020 InnovFin 
SME VC) and COSME (Equity Facility for Growth). These build  on earlier instruments, such as the 
GIF under the EIP/ CIP in 2007-2013. 

8.  The European Fund for Strategic Investments (ESFI) and  Horizon 2020 both already provide  legal 

scope to invest in VC FoF. 

9.  The  EIF  implements  equity-based  funding  schemes  as  an  entrusted  entity  on  behalf  of  the  EC  to 
support  innovative  SMEs,  such  as  the  High  Growth  Innovative  SME  Scheme  under  the  GIF  and, 
funded through COSME and Horizon 2020. 

10.  The EIF is the most significant player in the European VC ecosystem and has invested €4.2 billion 
over  the  last  18  years  in  >260  VC  funds.  It  runs  a  FoF  programme  of  €2.5  billion,  serving  as  a 
cornerstone investor and also managing 13 national FoF across the EU. 

11.  The EIF’s financial scope to increase the scale of its equity investments in the EU is set to increase 

in the near future under its Risk Capital Resources Mandate. 

12.  The  European  Bank  for  Reconstruction  and  Development  (EBRD)  also  runs  several  risk  financing 

schemes aimed at supporting the European VC industry.   

But a lack of private funding….. 

13.  Notwithstanding  the  public  sector’s  important  role,  there  is  a  lack  of  private  sector  investor 

participation in European VC at the underlying funds level and the FoF level. 

14.  Publicly-backed  FoF  are  unable  to  attract  international  capital  since  they  are  not  sufficiently 
commercially-oriented  and  /  or  the  minimum  ticket  size  is  below  the  threshold  at  which  large 
investors would be prepared to invest. 

Definition of policy objectives 

77 30.9.2015 COM(2015) 468 final 

44 

 
 
 
 
 
 
 
                                                           
Policy context & mapping existing provision  

1.  EU R&I policy emphasises the importance of ensuring support and access to finance for innovative 

SMEs with high-growth and internationalisation potential 

2.  The  European  Commission  “aims  to  make  the  European  venture  capital  (VC)  industry  more  self-
sustainable  and  globally  competitive  by  reducing  its  dependence  on  the  public  sector  and 
encouraging  more  investment  from  institutional  and  private  sources  back  into  VC,  especially  into 
early and growth-stage funds”. 

3.  The  intervention  under  consideration  in  this  study  aims  to  improve  the  supply  of  VC  throughout 
the economic cycle for firms undertaking R&I, and to attract institutional and private investors back 
to VC, to encourage the creation or expansion of FoF across Europe, to improve the average size of 
VC funds, and to complement the intervention with technical capacity-building measures. 

3.1  Advantages and disadvantages of a fund of funds structure 

A venture capital fund of funds (“VC FoF”) can be defined as a fund that makes equity investments 
in  a  number  of  different  underlying  seed  and  VC  funds78.  FoF  may  have  a  sectoral  or  geographic 
focus,  but  equally  may  be  generalist  or  non-geographically  targeted.    The  advantages  and 
disadvantages of a  FoF structure  as a mechanism for deploying  equity  capital to innovative  SMEs 
investing in research and innovation (“R&I”) are now considered.   

In the first table, the role of a FoF in addressing EU policy challenges is summarised:  

Table 15 – advantages and disadvantages of a FoF model (policy maker/ EC perspective) 

Challenges and objectives 

Overcome 
in the European market.  

fragmentation 

Increase the supply of VC.  

access 

to 
Maintain 
innovation 
financing 
(equity  capital)  for  high-
growth 
and 
SMEs. 

start-ups 

Role of a fund of funds 

  By investing in a portfolio of underlying funds, a FoF can help to increase 

the supply of VC.  

 

 

 

 

 

Fund  managers  benefit  from  access  to  an  additional  source  of 
investment.  This may help to increase the average size of European VC 
funds. 

The  pooling  of  resources  through  cross-border  FoF  may  help  Europe  to 
overcome fragmentation and strengthen critical mass.  

Since the early-2000s, private investors have largely exited the European 
VC market. 

FoF  are  a  useful  instrument  for  disbursing  EU  funds  to  support  the 
European VC industry. 

FoF  play  an 
important  counter-cyclical  role79.  Public  cornerstone 
investors  in  a  FoF  structure  help  ensure  access  to  equity  finance  for  VC 
funds and in turn to innovative, high-growth start-ups/ SMEs. 

  Mechanism  to  tap  untapped  sources  of  international  capital  from  large 

investors (see benefits for investors above). 

 

Comparatively low risk compared with direct investment in VC.  

Generate  leverage  on  EU 
funds by attracting private 
capital to European VC 

  An  objective  of  FoF  set  up  or  funded  by  the  public  sector  (e.g.  the  EIF, 
British  Business  Bank,  BPIFrance,  INEO  (ES)  is  to  leverage  in  additional 
private finance by acting as the cornerstone investor. 

 

Publicly-led  FoF,  often  EIF-backed,  have  been  successful  in  attracting 
significant  private  sector  funding  (a  ‘leverage  ratio’  of  between  5:1  and 
10:1 is not uncommon in some countries.  

  However,  FoF  in  which  the  EIF  has  played  a  crucial  role  either  as  a 

78  A  FoF  may  be  "fettered",  meaning  that  it  invests  only  in  funds  managed  by  the  same  investment  company,  or 
"unfettered", when it can invest in external funds. This study focuses on unfettered FoF. 
79 For instance, the UK Innovation Investment Funds was set up during the crisis. 

45 

 
 
 
 
 
 
                                                           
Policy context & mapping existing provision  

Challenges and objectives 

Role of a fund of funds 

cornerstone investor, fund manager or both typically achieve a 2:1 ratio, 
reflecting  the  difficulty  in  attracting  private  sector  funding  to  the 
European VC asset class in many European countries). 

Attract  private 
investors 
back to the asset class and 
attract  new  sources  of 
capital, 
as 
international investors. 

such 

 

Large  pension  funds  and  endowments  may  be  put  off  from  investing 
directly  in  VC  funds  through  a  lack  of  expertise,  operational  resources 
etc. but also due to their large size and minimum ticket thresholds.   

  A  FoF  structure  has  the  advantage  that  it  can  attract  large  investors  by 

allowing for investments of large ticket size to be invested.  

Create  greater 
within European VC. 

liquidity 

Risk diversification. 

  A  FoF  can  attract  new  sources  of  capital,  e.g.  tapping  into  international 
investor  networks.  Many  large  international  investors  e.g.  Sovereign 
Wealth  Funds,  private  pension  funds  and  institutional  investors  do  not 
currently invest in the European VC asset class.  

  Accessing  new  sources  of  capital  through  the  additional  scale  possible 
through  a  FoF  should  create  greater  liquidity  and  strengthen  exit 
mechanisms. 

  Whilst VC is a longer-term investment, a FoF mechanism could encourage 
the  further  development  of  secondary  markets  for  PE  investments,  for 
instance by allowing for early exits. 

 

Since public money is at stake, it is important that the public sector takes 
steps to mitigate risks. 

  Diversification  of  risk  through  investment  portfolio  of  underlying  funds 
across  a  group  of  underlying  VC  funds  (on  average,  a  VC  FoF  in  the  EU 
invests in 20-30 VC funds). 

In order to address market failures in the availability of risk capital, a number of FoF have been set 
up by the public sector. According to 2014 data from Invest Europe presented earlier, government 
agencies account (which includes EIF funding) for about 35% of venture funds raised.  

In the table below, the advantages of a FoF mechanism from the perspective of investors (Limited 
Partnerships or LPs) and VC funds (General Partners or GPs) are outlined: 

Table  16  -  Advantages  and  disadvantages  of  a  FoF  mechanism  –  different  stakeholder 
perspectives 

Stakeholder 
type 

Advantages 
(summary) 

Investors (LPs)  Portfolio 

diversification, 
professionally-
managed fund 
selection and 
economies of scale. 

Advantages (detail) 

  Diversification  of  risk  through 

investment  portfolio  of 
underlying  funds  across  a  group  of  underlying  VC  funds  (on 
average, a VC FoF in the EU invests in 20-30 VC funds). 

 

 

 

 

Spreading  risk  is  important  to  benefit  from  the  high-risk, 
high-return nature of investment in early-stage growth SMEs. 

FoF  managers  have  knowledge  of  both  established  and 
emerging  VC  fund  managers,  with  specialised  investment 
skills in selecting potential funds. 

Knowledge of the market and of top-quartile VC funds should 
enable  FoF  managers  to  deliver  superior  returns  compared 
to direct investment in funds.  

Compared  with  investing  directly  in  underlying  VC  funds,  a 
more effective mechanism for attracting large investors, who 

46 

 
 
 
 
 
 
 
Policy context & mapping existing provision  

have  a  minimum  ticket  size  (circa  €25m  –  100m)  which 
prohibits direct investment and favours investing through an 
intermediary. 

 

Economies  of  scale  from  starting  with  larger  size  individual 
FoF  could  translate 
institutional 
investors, potentially offsetting the additional layer of fees. 

lower  costs  for 

into 

Stakeholder 
type 

Advantages 
(summary) 

  Advantages (detail) 

Investors  
(LPs) 

Intermediary  between 
investors and investees  

 

For international investors, large-scale investment funds may 
not understand the European VC ecosystem well. 

  A FoF vehicle allows the European VC industry to access large 
pools of capital available among international investors (e.g. 
pension funds, sovereign wealth funds, etc.).  

 

FoF managers could promote the European VC asset class to 
large, international investors that might not otherwise invest 
in Europe, and not directly in start-up and early-stage growth 
firms. 

  A FoF vehicle may be attractive to larger investors, since it is 
unprofitable  to  invest  directly  in  VC  funds  due  to  high 
overheads  (e.g.  setting  up  equity  research  teams,  actively 
monitoring  investments)  relative  to  the  small  amounts  of 
seed and VC needed by start-ups and SMEs prior to the later 
stage. 

  VC  funds  fundraise  from  a  number  of  different  types  of 

investors (e.g. private equity, pension funds, the EIF).  

  However,  many  pension  funds  and  institutional  investors 
have  ceased  investing  since  the  early  2000s.  Public  sector 
FoF  have  provided  an  additional  investment  source  prior  to 
fund closure to address funding gaps.  

Disadvantage (detail) 

  Management  fees  are  applicable  at  both  the  FoF  level  and 
the underlying VC funds.   FoF levy fees of circa 0.6-1.1% on 
top of the management  fees associated with the underlying 
VC funds.  

  Given  poor  historical  performance,  the  double  layer  of  fees 
has deterred investors from investing in FoF vehicles, unless 
the fund manager’s performance is such that the  additional 
returns generated are able to justify the additional fees. 

VC funds (GPs)  Accessing 

of 

further 
capital, 
sources 
ensuring 
financing 
supply  during  cyclical 
economic downturns. 

Disadvantage 
(summary)   
Double layer of fees 

Investors  
(LPs) 

Investors  
(LPs) 

Poor 
track record 

performance 

 

FoF have not performed particularly well, reflecting the poor 
performance of the European VC asset  class  more generally 
in  the  past  15  years  (although  performance  returns  are 
improving).  

47 

 
 
 
 
 
 
 
Policy context & mapping existing provision  

3.2  EU policy and regulatory framework  

Promoting  access  to  finance  for  SMEs  (especially  for  SMEs  engaged  in  R&D  and  innovation  with 
high-growth  potential)  is  an  important  EU  policy  priority  and  has  been  cited  in  a  number  of 
Commission Communications since the late 1990s, when the Risk Capital Action Plan was adopted.  
The Action Plan on Building a Capital Markets Union80  (CMU) of 30th September 2015 notes that 
“public sector risk sharing can help to increase the scale of VC funds in Europe and the industry's 
footprint across all 28 Member States, as well as acting as a catalyst for private sector investment, 
helping  to  promote  scale,  diversification  and  geographical  reach.  The  promotion  of  FoF  could  in 
particular help broaden private investment in venture capital by attracting additional investment by 
institutional  investors.  A  commitment  has  also  been  made  to  launch  a  package  of  measures  to 
support VC and equity financing in the EU in 2016, including catalysing private investment using EU 
resources through one or more pan-European FoFs.  

This  is  also  reflected  at  an  institutional  level,  with  dedicated  units  dealing  with  access  to  finance 
within the Commission, such as DG RTD Unit B3 'Financial Engineering', who manages the Single EU 
Financial  Equity  Instrument  under  Horizon  2020.  The  crucial  role  that  venture  capital  plays  by  in 
financing  the  growth  and  development  of  start-ups  and  early-stage,  high-growth  firms  has  been 
emphasised  in  many  policy  Communications,  which  are  reviewed  in  brief  in  this  section.  In  this 
section, EU policy and regulatory developments relevant to the following are considered: 

  Promoting  the  development  of  cross-border  VC within  the  framework  of  the  Capital  Markets 

Union; 

  The  regulation  of  financial  services  and  markets  and  remaining  obstacles  to  attracting 

investment to the European VC asset class. 

EU policies and regulation are important elements of the overall framework conditions in which the 
European  VC  industry operates.  They may  serve  as a  positive  catalyst  to  the  development of  the 
European venture capital industry. Conversely, there may be unintended consequences that hinder 
the development of the sector by deterring investors from investing in the asset class.  

3.2.1  Policy developments relevant to fund of funds. 

There have been a number of EU policy developments relevant to a possible future EU-supported 
FoF programme. A chronological summary of key developments is now provided. 
In  October  2011,  the  EC’s  DG  GROW  held  a  workshop  on  VC  FoF81.  Following  the  workshop,  a 
number of public and private sector stakeholders have had ongoing dialogue and engagement with 
the EC. The 2011 workshop was prompted by the earlier development of a position statement82 by 
the EVCA on the need for further action to strengthen the supply of venture capital.  DG RTD has, 
however,  now  initiated  the  further  investigation of a  possible  FoF  instrument through  this  study. 
However,  there  are  several  other  DGs  looking  at  FoFs  in  various  contexts  –  EFSI  (ECFIN),  CMU 
(FISMA) etc. 
In the European Council conclusions of February 201183, the EC was invited to present a proposal 
for  putting  in  place  an  EU-wide  VC  FoF  scheme  building  on  the  activities  of  the  European 
Investment  Fund  and  other  appropriate  financial  institutions,  in  cooperation  with  national 

80 Brussels, 30.9.2015 COM(2015) 468 final 
81 Summary report of the FoF workshop: http://www.scribd.com/doc/213367902/Workshop-VC-FoF  
82 Accelerating Innovation & Delivering Growth: Using the Jobs, Growth and Investment Package to Attract Private Sector 
Investors to the European Venture Capital Industry (Invest Europe, November 2014). 
83 EUCO 2/1/11 REV 1, para 22: https://www.consilium.europa.eu/uedocs/cms_data/docs/pressdata/en/ec/119175.pdf  

48 

 
 
 
 
 
 
                                                           
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operators.  The legal bases of the 2014-2020 COSME and Horizon 2020 programmes, proposed by 
the  EC  in  November  2011  (adopted  in  December  2013),  contain  provisions,  as  part  of  their 
respective equity facilities84, for EU investment in FoF.    

In  2012,  the  EC    reaffirmed  that  it  was  necessary  to  strengthen  the  availability  of  seed  and  VC 
financing for start-ups and SMEs through the Small Business Act (SBA) and the Single Market Act (I 
and II)85, and to tackling remaining obstacles to cross-border VC (e.g. regulatory, tax). In the SBA, 
the  EC  committed  to  ensuring  that  VC  funds  established  in  any  MS  can  raise  capital  and  invest 
freely throughout the EU without obstacles or additional requirements. This commitment was also 
highlighted in the Innovation Union Flagship Initiative.  

In  its  Green  Paper  on  Long-Term  Financing  of  the  European  Economy86  (March  2013)  the  EC 
identified the development of the VC sector as a potential solution to the difficulties that SMEs face 
in  accessing  finance:  “The VC  sector  suffers  from  lack  of  resources  and  is  influenced  by  bank  and 
insurance regulation. Funds of funds could be efficient instruments to increase the volume of VC.” 
(pg 17). 

In  response  to  the  need  to  strengthen  the  framework  conditions  for  the  European  VC  industry, 
Regulation 345/2013 on European Venture Capital Funds was  adopted in 2013. This introduced a 
“common framework of rules regarding the use of the designation ‘EuVECA’ for qualifying VC funds, 
in particular the composition of the portfolio of funds that operate under that designation, eligible 
investment targets, the investment tools they may employ and the categories of investors that are 
eligible to invest in them by uniform rules in the Union”.  The purpose was to create legal certainty 
and to establish a level playing field within the internal market to boost the supply of VC. However, 
the  interview  feedback  suggests  that  this  labelling  scheme  has  only  been  rarely  used  by  market 
participants, partly because larger funds are subject to the AIFMD, the Alternative Investment Fund 
Managers Directive (Directive 2011/61/EU) – see next sub-section.   
The Action Plan on Building a Capital Markets Union87 (CMU) was adopted on 30th September 2015 
and addresses a broad range of issues relevant to the development of cross-border capital markets 
across the EU, such as the EuVECA Regulation mentioned above and, which provides a marketing 
passport for the EU.  Section 1.2 of the Communication, dealing with the early expansion phase of 
high-growth  firms,  is  especially  important  to  the  development  of  a  pan-European  fund  of  funds 
programme.  

84 For COSME, see Article 18 4. (b) and Article 5 of Regulation (EU) 1287/2013 of 11 December 2013 — page 43 of 
http://eur-lex.europa.eu/LexUriServ/LexUriServ.do?uri=OJ:L:2013:347:0033:0049:EN:PDF.  
For Horizon 2020, see Part II, section 2.2, para 2, of Council Decision 2013/743/EU of 3 December 2013 (Specific 
programme) — p. 996 of http://ec.europa.eu/research/participants/data/ref/h2020/legal_basis/sp/h2020-sp_en.pdf  
85 Single Market Act Twelve levers to boost growth and strengthen confidence COM/2011/0206 
86 http://ec.europa.eu/finance/general-policy/financing-growth/long-term/index_en.htm  

87  Brussels,  30.9.2015  COM(2015)  468  final,  http://ec.europa.eu/finance/capital-markets-union/docs/building-cmu-
action-plan_en.pdf) 

49 

 
 
 
 
 
 
 
                                                           
Policy context & mapping existing provision  

The CMU Communication notes that “public sector risk sharing can help to increase the scale of VC 
funds in Europe and the industry's footprint across all 28 Member States, and acting as a catalyst 
for leveraging private investment, helping to promote scale, diversification and geographical reach. 
The  promotion  of  FoF  could  in  particular  help  broaden  private  investment  in  venture  capital  by 
attracting  institutional  investors”.  A  commitment  has  also  been  made  to  launch  a  package  of 
measures  to  support  VC  and  equity  financing  in  the  EU  in  2016,  including  catalysing  private 
investment using EU resources through pan-European FoF.  On 30 September, the Commission also 
launched a public consultation on means of strengthening the effectiveness of EuVECA cross-border 
VC funds 88. 

The CMU reiterates the problems mentioned in other literature (e.g. EVCA, evaluations, academic 
literature) relating to the fragmentation of the European VC market. In some Member States, “VC 
funds face problems reaching the scale they need to spread their portfolio risk. The absence of an 
equity  investment  culture,  lack  of  information,  a  fragmented  market  and  high  costs  seem  to  be 
among the main reasons for this. Another issue raised is the “lack of exit opportunities for investors 
may also be an obstacle to the development of VC funding”. At present, many European start-ups 
eventually  move  their  headquarters  to  the  US  and  exit  there.  As  a  consequence,  many  of  the 
employment and wealth creation potential of innovative gazelles are not fully captured in Europe.  

The economic analysis accompanying the Action Plan provides an in-depth analysis of the problems 
of VC markets in Europe89.  It notes that the main obstacle to the development of VC investment in 
Europe is market fragmentation and that 75% of VC funds are smaller than EUR 82 million. It cites 
Invest Europe data from 2015, only 20% of funds had raised more than EUR 100 million over the 
last six years. The economic analysis also notes that there is 60% less VC investment in Europe in 
2012 compared with 2007.  It also notes that the  current  supply of VC is concentrated in a small 
number  of  sectors  any  may  not  therefore  be  available  to  meet  demand  in  other  sectors.  
“Companies  active  in  growing  business  sectors  such  as  life  sciences,  communications  and 
electronics  attract  the  majority  of  the  available  funds”.  It  also  notes  that  “the  impact  of  VC 
investment on productivity growth has been studied and shows that enterprises backed by VC are 
more  competitive  than  others,  feature  higher  individuality  of  their  products  and  have  better 
technologies” (see Szerb (2009)).  

3.2.1.1  Framework conditions (regulatory, fiscal) 

The  framework conditions  for  European  VC  are  an  important  factor  that  influences  supply-side 
dynamics.  These include, among others, the regulatory environment, the presence or absence of 
fiscal incentives for investors, the extent to which there is a culture of entrepreneurship etc. 

There  have  been  a  number  of  regulatory  developments  at  EU  level  following  the  economic  and 
financial crisis with more stringent regulation of alternative forms of investment being adopted in 
parallel  with  other  EU  and  international  legislation  to  strengthen  capital  adequacy  ratios  among 
banks  and  pension  funds  and  other  types  of  financial  institutions,  such  as  alternative  asset 
managers. This legislation includes: 

  Alternative Investment Fund Managers Directive (AIFMD) (2011/61/EU) – which governs the 

regulation of alternative investment fund managers (AIFMs) operating in the EU. 

  The  Solvency  II  Directive  (2009/138/EC),  which  codifies  and  harmonises  EU  insurance 

regulation. 

  The Basel III Regulation – international legislation relating to the capital adequacy of banks.  

88 http://ec.europa.eu/finance/consultations/2015/venture-capital-funds/index_en.htm 
89 http://ec.europa.eu/finance/capital-markets-union/docs/building-cmu-economic-analysis_en.pdf  

50 

 
 
 
 
 
 
                                                           
Policy context & mapping existing provision  

The AIFMD covers all collective investment schemes (and their managers) in the  EU, on a default 
basis.  Unless  a  collective  investment  scheme  is  covered  by  the  UCITS  Directive  (on  an  "opt-in" 
basis),  all  fund  managers  will  be  covered  by  the  AIFMD.  Note  that  the  AIFMD  regulates  also 
collective investment/fund management below the EUR 500 million threshold. However the AIFMD 
has  a  de  minimis  exemption  (AUM  <  EUR  500 million)  for  which  a  light-touch,  registration-based 
regime applies and exempts small fund managers from the most burdensome requirements. At the 
same time, the de minimis threshold withholds the pan-EU passport from a large population of AIFs 
and  their  managers.  Two  passporting  regimes  have  been  developed  for  VC  funds  (EuVECA)  and 
social entrepreneurship funds (EuSEF), the managers of which typically fall under the AIFMD's AUM 
threshold.  Sub-threshold  AIMFs  registered  under  the  AIFMD  (but  not  fully  authorised,  and 
therefore not benefitting from the AIMFD passport) can opt in to the EuVECA regime and obtain a 
passport. 

A  number  of  stakeholders  interviewed  attested  to  unintended  consequences  associated  with  the 
above EU regulations, such as undermining the attractiveness of the European VC sector as an asset 
class  because  of  the  administrative  and  regulatory  burdens  associated  with  investing  in  Europe. 
Similar  concerns  have  been  voiced  in  response  to  the  Capital  Markets  Union  Green  Paper 
consultation under questions 5, 10, and 15.90 A number of specific issues were raised by potential 
investors:  

 

Investment in seed and VC among investors may be deterred due to regulatory uncertainty.  

  Although this appeared to be a more significant problem in the period immediately following 
the financial crisis, perceptions of an overly burdensome regulatory framework in the EU may 
continue to deter some investors. 

  However,  the  EU  has  now  shifted  from  dealing  with  financial  crisis  to  once  again  easing  the 

regulatory burden for businesses and potentially also financial services /investors. 

  A particular issue for larger international investors is that ensuring regulatory compliance and 
monitoring  ongoing  potential  future  regulatory  developments  is  not  seen  as  proportionate 
given the relatively modest potential asset allocation to European VC relative to total fund size/ 
AUM. 

These  issues  were  also  raised  by  respondents  to  the  CMU  Green  Paper  consultation  in  their 
answers to several questions (e.g. Q5, Q10 and Q15)91.  On 30th September, the Commission also 
launched  a  call  for  evidence  on  the  Call  for  evidence:  EU  regulatory  framework  for  financial 
services92. 

Turning to the Basel III Regulation, although banks are unlikely to invest in European VC funds (or 
fund of funds), more stringent capital adequacy requirements have an impact on the demand-side 
by tightening credit. 

Other key developments of relevance to a possible future pan-European FoF programme are also 
important to note in relation to EU funding. On 25 June 2015, the Council adopted a regulation on a 
European  fund  for  strategic  investments  (EFSI)  aimed  at  stimulating  the  economy  through  the 
European  Fund  for  Strategic  Investments  (EFSI)  93.  This  is  highly  relevant,  given  the  focus  on 

90 http://ec.europa.eu/finance/consultations/2015/capital-markets-union/docs/summary-of-responses_en.pdf.  
91 Please see feedback statement: http://ec.europa.eu/finance/consultations/2015/capital-markets-
union/docs/summary-of-responses_en.pdf. 
92 http://ec.europa.eu/finance/consultations/2015/financial-regulatory-framework-review/index_en.htm 
93 Regulation on the European Fund for Strategic Investments - EFSI Regulation (EU) 2015/1017 of 25 June 2015 

51 

 
 
 
 
 
 
                                                           
Policy context & mapping existing provision  

leveraging existing EU investments. Fund of funds are explicitly mentioned, and equity and quasi-
equity instruments are among the financial instruments that will be used to implement EFSI.   

Point  21 of  the  recitals  states  that “many  SMEs,  as well  as mid-cap  companies,  across  the  Union 
require  assistance  to  attract  market  financing,  especially  as  regards  investments  that  carry  a 
greater degree of risk. Given that the EFSI sets an ambitious multiplier of 1:15, the possibility of a 
‘double  leverage’  effect of  a  FoF  mechanism  e.g.  attracting  private  sector  investment  –  including 
international capital - from LPs at the FoF and underlying funds level is relevant.  

The  EFSI  Regulation  emphasises  that  “attention  shall  be  paid  to  the  complementarity  of  new 
infrastructure  and  innovation  window  products  focusing  on  SMEs  and  small  mid-cap  companies 
with  existing  EU  financial  instruments  and  EFSI  financial  instruments  under  the  SME  window  so 
that the highest level of efficient use of financial resources is achieved”. 

  Poor returns are the major factor deterring investors from investing in European VC. Although 
according  to  some  interviewees,  institutional  investors  have  been  deterred  from  investing  in 
European  VC  due  to  the  more  stringent  regulatory  requirements  (e.g.  Solvency  II,  Basel  III) 
relating  to  capital  adequacy,  the  extent  to  which  EU  regulation  has  deterred  institutional 
investment should not be over-estimated. For regulatory purposes, VC is categorised together 
as private equity, yet data from Invest Europe shows that institutional investors are increasingly 
turning to later-stage PE (buy-out and mezzanine funds), but avoiding VC (seed, early and late 
stage).  This  suggests  that  returns  rather  than  risk  aversion  stemming  from  regulatory 
requirements,  is the  main reason why private institutional investors only  invest  in later-stage 
PE. 

  For  international  investors,  since  European  VC  was  only  a  small  potential  element  as  part  of 
their total global asset allocation, the presence of regulatory obstacles was viewed as being a 
further  barrier  to  investing  in  European  VC.  Some  interviewees  however  commented  that 
regulatory uncertainty was worse than the actual regulations adopted. Invest Europe suggested 
that  looking  ahead,  regulation  may  be  less  of  a  perceived  barrier  than  it  has  been  in  the 
previous 3-5 years. 

  Turning to the impact of national fiscal regimes on investment in the European VC asset class, 
the favourable tax regime for individuals in some EU countries such as the UK and France has 
incentivised  investment  in  VC  for  Ultra  High  Net  Worth  Individuals  (UNHWIs)  and  HNWIs.  
Such  investors  are  among  the  most  active  in  angel  and  early-stage  VC.  This  also  has  the 
advantage of  leveraging  the  entrepreneurial  potential  of the  individuals  concerned,  who may 
be able to assist investee companies with expertise.  

  However, institutional investors face fiscal disincentives to invest in VC, since they face all the 
same risks but do not benefit from the same fiscal rewards as individuals. The tax position can 
therefore distort the market for investment. 

3.3  Existing  provision  of  equity  financing  instruments  to  support  innovative  start-ups 

and SMEs in Europe 

3.3.1 

Introduction 

In  assessing  the  scope  for  further  possible  EU  support  for  the  European  VC  asset  class,  it  was 
necessary  to  take  into  account  the  baseline  situation  in  respect  of  the  provision  of  existing  EU 
funded equity capital to address market failures and the level of funding allocation. This is a pre-
requisite before the question as to whether there is a need for additional EU funding through a FoF 
(or  FoF  programme)  mechanism  can  be  established.  In  this  section,  an  analysis  of  the  different 

52 

 
 
 
 
 
 
Policy context & mapping existing provision  

types  of  funding  instruments  supported  and  the  level  of  EU  funding  already  invested  in  venture 
capital (and the timing of investments) is therefore provided.  

The  EU  provides  financial  support  for  risk  capital  for  innovative  start-ups  and  SMEs  through  a 
number of programming and other types of instruments. This section includes a review of:  

  EU risk capital financing schemes funded through EU multi-annual programmes with a focus on 

equity instruments (e.g. 2007-2013, 2014-2020);  

  EU funding through the EIF’s Risk Capital Mandate (RCM) now Risk Capital Resources Mandate 
(RCR)94.  The  EIF  operates  a  fund  of  funds  programme  and  makes  direct  co-investments  in 
venture capital funds; 

  Funding  schemes  implemented  by  other  actors  that  have  invested  in  the  European  VC  asset 

class (e.g. the EBRD). 

  Examples of EU-funded and private fund of funds programmes. 

3.3.2  EU multi-annual programmes in support of venture capital 

3.3.2.1  EU financial instruments for equity capital in 2007-2013 

In the 2007-2013 programming period, the main financial instruments to provide equity capital to 
support innovative start-ups and SMEs were: 

  The  High  Growth 

Innovative  SME  Scheme  (GIF)  within  the  EIP  pillar  within  the 
Competitiveness  and  Innovation  Framework  Programme  (CIP).  The  GIF  supported  co-
investments in VC funds and business angels.  

  The  SME  guarantee  facility  (SMEG),  which  provided  direct  guarantees  to  financial 

intermediaries providing SMEs with loans, mezzanine finance and equity. 

  The  RSFF  (Risk-Sharing Finance Facility)  and  RSI  (Risk-Sharing  Instrument)  through  the 
Seventh Framework Programme (FP7).  RSFF  made  EIB-backed  loans  and  mezzanine  finance 
available to large corporates and mid-caps investing in RTDI, while innovative SMEs and small 
mid-caps benefitted from RSI, a loan guarantee scheme run by the EIF. 

  Structural  Funds  support  for  VC  and  other  forms  of  risk  financing.  The  ERDF  provided 
considerable support for VC. In addition, the JEREMIE Holding fund implemented by the EIF and 
overseen by DG REGIO is the most relevant instrument.  

The  EIB  (including  the  EIF)  has  been  designated  as  an  entrusted  entity95  and  delegated  to 
implement a number of programmes on behalf of the EC.  Currently, the EIF is the only  entrusted 
entity,  although  it  has  not  been  precluded  that  other  entrusted  entities  could  be  appointed  in 
future. 

Through  the  High  Growth  Innovative  SME  Scheme  (GIF),  €550  million  was  allocated  to  the  EIF  in 
2007-2013 to make VC investment in SMEs through a fund of funds mechanism. The EIF managed 
the  funds  and  provided  co-financing  to  national  and  multi-country  venture  funds,  which  in  turn 
made funding available to start-ups and SMEs for early-stage and expansion funding rounds. There 
were two main instruments within the GIF: 

94  A  description  of  the  RCM  and  its  implementation  and  effectiveness  to  date  is  provided  in  a  2009  EIB  Evaluation 
http://www.eib.org/infocentre/publications/all/evaluation-eif-venture-capital-operations.htm 
95 A new EU legal framework for financial instruments was adopted in 2014. This enables the European Commission to 
designate  entrusted  entities.  Such  a  Single  Framework  Agreements  (FAFA)  has  been  signed  with  the  EIF  to  deliver  the 
equity component within Horizon 2020 and COSME. 

53 

 
 
 
 
 
 
                                                           
Policy context & mapping existing provision  

  Risk capital for innovative SMEs in their early-stages (GIF1). The EIF usually invested between 
10 and 25% of the total equity of the intermediary VC fund (or up to 50% in specific cases); 

  Risk capital for SMEs with high growth potential in their expansion phase (GIF2). The EIF was 
able  to  invest  between  7.5%  and  15%  of  the  total  equity  in  the  intermediary  venture  capital 
fund. In exceptional cases, this could be increased up to 25%. 

Some  data  is  available  on  the  outcomes  achieved  through  the  implementation  of  the  GIF  within 
COSME:  

Table 17 - Results of the GIF within the CIP by investment stage96 

GIF 1 - Early-stage 

GIF 2 - Expansion and Growth Stage  

  GIF 1 commitments into 29 funds 
  EUR 381m commitment 
  EUR 1.8bn total fund sizes 
  17 countries 
  354 portfolio companies 

  Commitments into 14 funds 
  EUR 172m commitment 
  EUR 1,2bn total fund sizes 
  13 countries 
  83 portfolio companies 

There  is  some  limited  IRR  data  available  from 
DG GROW, but this is not publicly available. 

In  addition,  monitoring  data  is  presented  in  the  Final  Evaluation  of  the  Entrepreneurship  and 
Innovation Programme (2011) in respect of the average cost/ job for early-stage funds (GIF 1) was 
EUR  6,362,  whilst  the  average  cost/  job  for  the  expansion  stage  (GIF  2  –  later  stage)  was  EUR 
10,420. 

Building on the successes of earlier programming periods, there was also continued support for VC 
through the EU  Structural Funds (ERDF) in the 2007-2013 period.  By 30th  September 2011, € 1.9 
billion  in  VC  funding  had  been  mobilised  for  SMEs  and  by  the  end  of  2012,  124  funds  were 
providing  equity  funding  and  hybrid  loan  and  equity  products  to  start-ups  and  to  existing  SMEs. 
According  to  EC  monitoring  data,  there  were  2,021  equity/venture  capital  investments  in 
enterprises,  representing  a  total  of  €747  million  of  ERDF  contributions  through  operational 
programmes.    It  should  however  be  noted  that  most  Structural  Funds  support  for  financial 
instruments during the 2007-2013 period was either in the form of loans or loan guarantees (€8.6 
billion).   

In  2007-2013,  EUR  1168.1  million  was  made  available  through  the  JEREMIE  holding  instrument 
funded  through  ERDF  Structural  Funds  (EIF  data).  JEREMIE  was  implemented  by  the  EIF  in 
conjunction with national and regional managing authorities. The use of JEREMIE was optional and 
designed  to  help  Member  States  with  less  experience  of  managing  investments  into  VC  funds. 
JEREMIE was more commonly used as a mechanism to deploy funds in the new member states. It 
was  nevertheless  used  at  regional  level  in  Western  Europe,  for  instance  in  France  (Languedoc 
Roussillon, the PACA region in southern France), Italy (Campania, Calabria and Sicily) and in Spain 
(Extremadura). It therefore helped to address under-provision in less mature VC markets. 

96 Situation in September 2014 as per EIF presentation 

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Policy context & mapping existing provision  

An overview of the total level of investment through JEREMIE in seed and VC is provided below:  

Table 18 - Holding Funds Supported by Structural Funds (JEREMIE) 

JEREMIE Holding Funds (country) 

Size in EUR 

BULGARIA 
CALABRIA (IT):  
CAMPANIA (IT):  
CYPRUS (CY):  
EXTREMADURA (ES) 
GREECE: 
LANGUEDOC ROUSSILLON (FR): 
LITHUANIA (LT):  
ROMANIA (RO):  
MALTA (MT):  
PACA (FR):  
SLOVAKIA (SK):  
SICILY (IT):  
SICILY ESF (IT):  
Total 

Source – EIF, 2015.  

EUR 349m 
EUR 45m 
EUR 90m 
EUR 20m 
EUR 10m 
EUR 250m 
EUR 30m 
EUR 67.1m 
EUR 100m 
EUR 12m 
EUR 20m 
EUR 100m 
EUR 60m 
EUR 15m 
EUR  1168,1 

Through the interview feedback, it was noted by several stakeholders that a drawback of JEREMIE is 
that JEREMIE funds are domestically-focused and that there are geographic restrictions on where 
selected VC managers which serve as intermediaries can invest in SMEs.  

3.3.2.2  EU financial instruments for equity capital in 2014-2020 

In  the  2014-2020  period,  the  Single  EU  Equity  Financial  Instrument  supports  research  and 
innovation in European enterprises’ with fast-growth potential from seed through early-stage up to 
expansion and growth stage. The instrument is being funded through Horizon 2020’s InnovFin SME 
Venture Capital scheme, which will provide €430m in support through the Access to Risk Finance 
Programme  and  COSME  (Programme  for  the  Competitiveness  of  Enterprises  and  Small  and 
Medium-sized  Enterprises),  the  successor  programme  to  the  GIF  within  the  Competitiveness  and 
Innovation Framework Programme (CIP).  

The  creation  of  a  Single  EU  Equity  Financial  Instrument  represents  the  transition  in  2014-2020 
towards a more integrated approach to EU financial instruments schemes to strengthen access to 
equity capital for SMEs.  The Single EU Equity Financial Instrument consists of: 

  Horizon  2020’s  InnovFin  SME  Venture  Capital  scheme  -  the  Single  EU  Equity  Financial 
instrument  was  launched  in  June  2015  and  is  supporting  SMEs (small to  midcaps)  that  are 
focused on research and innovation activities. Funding of up to EUR 330m. 

  COSME  –  the  Equity  Facility  for  Growth  will  provide  VC  to  enterprises,  with  a  focus  on  the 

growth phase. Funding of up to EUR 660m. 

Both programmes support multi-stage funds on a pro-rata basis.  The difference between the two is 
that whereas COSME will only focus on SME's, Horizon 2020 will provide equity finance to research 
organisations and larger companies. The rationale for supporting innovative financial instruments in 
the 2014-2020 period cited in programme documentation is that there remains a need to address 

55 

 
 
 
 
 
 
Policy context & mapping existing provision  

continued  market  failures  in  debt  and  equity  markets  supporting  R&I  and  growth  and  to 
complement  national  and  regional  “access  to  finance”  schemes  for  SMEs.  In  relation  to  equity 
finance,  “access  to  equity  remains  scarce  for  early  /  growth-stage  investments;  average  VC  fund 
sizes are sub-optimal and there is a need to build an integrated European VC market”. 

The implementation of the Single EU Equity Financial Instrument (as with predecessor programmes) 
has  been  delegated  to  the  EIF  by  the  EC.  In  future,  there  could  however  be  an  expansion  in  the 
number  of  entrusted  entities  to  include  other  supra-national  institutions  (the  EBRD  has  been 
mentioned as one possibility).  

In June 2015, during the First Innovative Enterprise Week in Riga, the EIB Group and the European 
Commission (EC) launched three new financial products to boost the competitiveness of innovative 
companies in Europe under the "InnovFin – EU Finance for Innovators" programme. Two products 
are  loan-based  but  the  third,  an  innovative  financial  product  launched  by  the  EIF  is  the  InnovFin 
SME Venture Capital Facility. It focuses on Venture Capital funds that target start-ups, which often 
find it challenging to obtain financing. The EUR 430m allocation to early-stage funding will target 
enterprises located in EU Member States and Horizon 2020 Associated Countries. The EIF expects 
to invest in around 30 funds, helping to generate total investment in start-ups of up to EUR 1.6bn. 
In addition, the Commission has expanded the InnovFin advisory mandate: making innovative firms 
more attractive to private investors, benefitting new businesses across Europe.  

In the 2014-2020 period, the EIF will be responsible for implementing the successor EC programmes 
“Competitiveness for SMEs” (“COSME”) , Horizon 2020 and other EC mandates, as appropriate, as 
well as the second generation of Decentralized Financial Instruments (“DFI” or ex-“JEREMIE”). 

As in previous programming periods, there will be continued support for seed and venture capital 
through the European Structural and Investment Programmes 2014-2020. There will be a second 
generation  of  Decentralized  Financial  Instruments  (“DFI”  or  ex-“JEREMIE”)  capitalising  on  the 
improved regulatory framework and building on lessons learned. The interview feedback suggested 
that  whilst  there  are  disadvantages  from  an  investor  perspective  in  setting  up regional  VC  funds, 
such as the perceived overly constrained geographic and sectoral focus of investments, regional VC 
funds  form  an  important  part  of  the  overall  publicly  funded  seed  and  VC  landscape  especially  in 
regions that are under-served by VC provision due to their weak state of maturation. 

3.3.2.3  Pilot instruments to support the accelerated growth of innovative start-ups and 

SMEs in Europe. 

Under  Horizon 2020,  it  is also  important  to  note  that  the  Commission  is  supporting  pilot  funding 
schemes  in  order  to  promote  the  accelerated  growth  of  innovative  start-ups  and  SMEs.  This 
includes the “Pilot facility for technology transfer” and the Fast Track to Innovation (FTI) pilot.  It 
should be noted that one of the sub-options (Option 2.3) considered in Section 4.2/ 4.3 is increasing 
EU funding to these pilots. Further information about these pilot initiatives is now provided.  

The purpose of the Pilot facility for technology transfer is to:  

  Target  the  transfer  of  R&D  results  with  a  high  commercial  potential  from  public  research 

organisations to the market in particular by:  

  Providing  finance  (equity,  subordinated  loans)  for  technology  transfer  through  the 

creation of companies (PoC, seed, early start-up phase) or licensing  

  Supporting  targets  the  very  early-stage  of  new  companies  before  conventional, 

commercial venture capital would be available  

The Technology Transfer Finance Facility (TTFF) will need to: 

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Policy context & mapping existing provision  

  Provide  proof of  clear  EU  added  value  (addressing  a  market  gap;  no  crowding-out  of  existing 

schemes at national or regional level; cost-effective implementation possible) 

  Provide  finance  in  the  form  of  equity  or  quasi-equity  (including  subordinated  loan  finance) 
intended to be a pilot facility for the period 2015-2017, with support from Horizon 2020 (Access 
to Risk Finance). 

This pilot  facility will co-finance  investments made by existing technology transfer (TT) funds and 
vehicles.  It  will  focus  on  TT  undertaken  via  the  creation  of  new  companies  and  the  licensing  of 
intellectual  property  (IP),  and  concentrate  on  the  proof-of-concept,  development  and  early 
commercialisation  stages  of  the  TT  process.  It  builds  on  the  experiences  gained  from  the 
Technology Transfer Pilot (TTP) implemented in 2007-2013 by the European Investment Fund (EIF) 
and from the investments in TT funds made by EIF under GIF-1 in CIP.  The indicative budget is €60 
million from the 2015 budget. 

The  TTFF  approach  is  being  accompanied  by  a  capacity-building  action  to  improve  the  investor 
readiness  of  projects,  research  teams  and  TTOs,  also  includes  mentoring,  not  about  patenting  or 
licencing. It is expected that 60 TTOs to benefit, and this will help to secure further TT investment.  

The  Fast  Track  to  Innovation  (FTI)  pilot  provides  funding  for  bottom-up  proposals  for  close-to-
market  innovation  activities  in  any  area  of  technology  or  application.  This  thematic  openness  – 
combined  with  the  possibility  for  all  kinds  of  innovation  actors  to  work  together  and  deliver 
innovation  onto  the  market  and/or  into  society  –  should  nurture  trans-disciplinary  and  cross-
sectoral cooperation. 

The aim is to: 

 
 
 

reduce time from idea to market, 
stimulate the participation of first-time applicants to EU research funding, and 
increase private sector investment in research and innovation. 

The FTI Pilot will be implemented in 2015 and 2016 with a budget of €200 million (€100 million per 
year) across the Horizon 2020 priority “Societal Challenges” and the specific objective “Leadership 
in  Enabling  and  Industrial  Technologies  (LEITs)”.  The  pilot  will  be  implemented  through  one 
common and continuously open call, meaning that proposals can be  submitted at any time.  The 
continuation of the Fast Track to Innovation beyond 2016 will depend on the results of an in-depth 
evaluation of the pilot scheme.  

3.3.3  Other international organisations involved in the provision of European VC  

The  European  Bank  for  Reconstruction  and  Development  (EBRD)  was  founded  in  1991,  and 
operates  in  34  countries  from  central  Europe  to  central  Asia  and  the  southern  and  eastern 
Mediterranean.    This  includes  central  and  eastern  Europe  in  the  countries  of  the  ex-Soviet  Block 
(former  CIS  countries)  and  south-eastern  Europe  (including  the  Balkans).  Its  objectives  are  to 
supports the transition to market economies and to promote private and entrepreneurial initiative. 
The  bank  is  owned  by  64  countries  and  two  inter-governmental  institutions  (the  EU  and  the 
European Investment Bank). 
In addition to its other investment  and lending activity, the  EBRD invests in equity funds97  across 
the  countries  that  form  part  of  its  geographic  mandate.  The  EBRD's  activities  extend  beyond 
investing in equity funds and making an investment return alone. In particular, the main objectives 
include:  

97 http://www.ebrd.com/equity-funds.html 

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  Making equity finance available to SMEs. 
  Building  long-term  institutional  capacity  in  the  region  by  supporting  both  first  time  and 

successor funds which demonstrate strong management team potential. 

  Developing  capacity  through  innovation  -  underpinning  the  development  of  industry  capacity 

through diversification and innovation.  

  Fostering  local  innovation  and  technological  development  by  supporting  “best  in  class”  local 
and international sponsors in specialist technology-focussed venture capital and private equity 
fund managers.  

  Attracting institutional investors.  
 

Increasing transparency - working to increase the transparency, visibility and attractiveness of 
private equity industries in the region for domestic and international investors, for instance by 
strengthening cooperation with local VC industry associations. 

The EBRD is the single largest investor in private equity funds in the regions in which it operates.  In 
the  past,  in  the  venture  capital  part  of  the market,  the  EBRD  has  mainly  invested  in  larger-scale, 
balanced or later-stage VC funds.98 Since 2012, however, it has also made direct co-investments in 
early  and  growth-stage  ventures  alongside  experienced  venture  capital  investors  through  its 
Venture  Capital  Investment  Programme  (VCIP)99  and  in  2014,  it  strengthened  its  commitment 
specifically  to  seed  and  early-stage  technology  investments  by  putting  in  place  a  dedicated 
financing programme for early-stage focused venture capital funds and business accelerators, the 
Early-Stage  Innovation  Facility  (ESIF).    The  ESIF  integrates  additional  pre  and  post-investment 
advisory  support  administered  by  EBRD  to  further  assist  underlying  entrepreneurs  and  the  fund 
managers  in  developing  these  early-stage  enterprises  with  the  limited  financial  and  technical 
resources available to them.  

In the following table, information about the role of the EBRD in building the VC infrastructure and 
in supporting new and emerging VC funds is provided.  

Table 19 - Spotlight on the EBRD and its support for European VC 

The EBRD has supported more than 180 funds since its inception through  intermediated investment vehicles. 
These have in turn supported 1300+ investments in enterprises. As at mid-2014, the EBRD has achieved 18.5% 
gross IRR since its inception, which is comparable with commercial rates of IRR.  

The  role  of  the  EBRD  in  supporting  new  and  emerging  fund  managers  should  be  particularly  stressed.  For 
instance, in 2014, approximately 80% of the fund management teams it supported through new fund closures 
were new teams. Although this was unusually high, and historically the average is closer to 60%, it demonstrates 
the EBRD’s commitment to supporting new market entrants, reflecting the relatively early state of maturation 
of the VC industry in many of the countries in which it operates. It should be noted here that the EIF also invests 
in  new  and  emerging  fund  managers,  at  least  in  less  developed  VC  markets.  For  instance,  many  of  the 
underlying VC funds securing VC funds for the Baltic Innovation Fund had been established relatively recently 
(some were established specifically to gain experience as first-time fund managers under the JEREMIE holding 
fund instrument). 

Since  the  EBRD  operates  in  geographies  where  VC  markets  are  not  that  well  developed,  its  role  is  viewed  as 
extending  beyond  making  investments  across  multi-investment  stages  in  the  European  VC  marketspace,  but 

98 In addition, the EBRD makes direct investments (and co-investments with these funds) into more mature technology 
companies through its ICT sector team. See http://www.ebrd.com/information-and-communication-technologies.html 
99  See  http://www.ebrdvcip.com/.  This  Programme  is  administered  by  a  team  of  three  dedicated  investment 
professionals, and an Advisory Committee which is complemented by three outside venture capital partners. To date, six 
investments have been completed. 

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also  in  enhancing  the  technical  capacity  of  fund  managers  in  which  it  invests  and  in  helping  to  build  a 
sustainable  VC  ecosystem  more  broadly.  It  has  put  in  place  mechanisms  through  its  Enterprise  Growth 
Programme to be able to bring in technical, functional and sectoral expertise to support fund managers and the 
technology entrepreneurs supported by those funds.  

Through the ESIF initiative, the EBRD seeks to engage “best in class” experts to work together with VC managers 
and portfolio companies to help them in certain areas.  For instance, if a young company with limited financial 
and  human  resources  needed  an  international  expert  for  a  time-limited  engagement  to  assist  it  to  develop  a 
digital marketing strategy, then the EBRD can seek to assist identify suitable experts and finance the provision of 
expertise for short periods. This was seen as an important differentiator in the EBRD’s engagement in the early-
stage space. The EBRD has also invested in pilot capacity-building initiatives such as the “Integrated Approach 
for  the  Further  Development  of  the  Venture  Capital  and  Private  Equity  Ecosystem  in  the  Baltic  States”  which 
commenced in 2013. Further details about this initiative are provided in Appendix B (case studies). 

It should be noted that a more detailed case study on the EBRD is provided in Appendix B. 

3.3.4  EIF investment in seed and venture capital  

It  should  be  noted  that  this  section  provides  an  overview  of  the  EIF’s  equity-based  activities. 
Further detail on its fund of funds programme is provided in the following sub-section, alongside 
other types of FoF programmes operated at national level and by the private sector. 

The European Investment Fund (EIF) was founded in 1994 as part of the European Investment Bank 
group  (EIB).  It  is  the  European  financial  institution  which  promotes  the  creation,  growth  and 
development  of  Small  and  Medium-sized  Enterprises  (SMEs)  by  guaranteeing  SME  loans  and  by 
financing the venture capital funds that invest in SMEs.  Article 2 of the EIF Statutes commits the EIF 
to support EU policy objectives. 

It  is  therefore  important  to  analyse  the  size  and  scope  of  the  EIF’s  current  activities  to  support 
venture capital across  its different mandates. It is also necessary to check  whether there  are any 
gaps in provision not currently served by the EIF, whether geographic or by investment stage.   
Over  the  last  18  years,  the  EIF100  has  invested  €4.2  billion  in  more  than  260  European  VC  funds 
benefitting  more  than  3,800  underlying  companies.101  In  2014,  the  EIF  has  private  equity  assets 
worth € 8.2 billion under management (own and mobilized capital combined) - €19 billion in early-
stage  and  €6.4  billion  in  growth stage  investments.102  The  EIF’s  Risk  Capital  Mandate  (RCM)  was 
signed in 2000 and was recently extended through the new Risk Capital Resources (RCR) mandate. 
This allocated the EIF an additional €2.5 billion in funding to support European private equity and 
VC funds. Ultimately, the aim is to supply SMEs and mid-caps with a combined additional €75 billion 
in funding103. 
An Evaluation of EIF funding of Venture Capital104 noted that since the EIF’s first mandate in 2000, 
the EIF has played an important role as a cornerstone investor and fund manager. It now has some 
25 separate mandates, including a mandate for each of the EU programmes where it manages VC 
Instrument in  2014  –  2020,  which 
instruments,  such  as  the  Single  EU  Equity  Financial 
supports European enterprises’  growth,  research  and  innovation  (R&I)  from  the  early-stage, 
including seed and early-stage growth through to expansion.  As such, the EIF plays an important 
role within the European venture ecosystem.  

100 The EIF is part of the EIB Group and shares are held by the EIB (63.7%), EU (24.3%), and 26 public and private banks 
and financial institutions (12%). Some national financing banks are EIF shareholders (e.g. KfW, BPIfrance). 
101 European Venture Capital - the Facts. Presentation by Patric Gresko, the European Investment Fund.  
102 EIF Annual Report 2014. P. 10 
103 Presentation 20.5.2015. Introducing the EIF. 
104 Evaluation of EIF funding of Venture Capital by the EIB Group’s Operations Division in 2006 

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3.3.4.1  The EIF’s equity and risk capital financing mandates 

The  different  EIF  mandates,  and  the  volume  of  funding  involved  in  each  of  these  funding 
mechanisms, are now considered. In particular, the following are examined:  

  The size and current geographic scope of the EIF’s fund of funds programme which was set up 

under the Risk Capital Mandate (now the Risk Capital Resources - “RCR” - mandate.  

  The  nature  and  size  of  the  EIF’s  mandates  to  implement  EU  programmes  on  behalf  of  the 

European Commission in the 2007-2013 and 2014-2020 programming periods. 

The  EIF’s  role  in  providing  equity  and  other  forms of  risk  capital  financing  dates  back  to  the Risk 
Capital  Mandate  (RCM)  delegated  to  it  by  the  EIB  in  2000.  The  Risk  Capital  Resources  (“RCR”) 
mandate provided by the EIB has recently been increased from €5bn to €7.5bn105. The RCR is not 
linked  to  a  multi-annual  programming  period  and  has  enabled  the  EIF  to  set  up  a  fund  of  funds 
programme and to make direct co-investments in VC. 

As  noted  in  the  previous  section,  the  EIF  has  a  mandate  to  operate  various  EU  programmes  on 
behalf of the EC in the 2007-2013 and 2014-2020 programmes. The objective is to assist the EU in 
the  efficient  and  effective  deployment  of  capital  to  support  access  to  (innovative)  risk  finance 
through a number of financial instrument programmes that use equity / quasi-equity instruments.   
In the following table, monitoring data in relation to risk capital finance programmes managed by 
the  EIF  through  its  various  mandates  (including  those  on  behalf  of  the  European  Commission)  is 
summarised. These correspond to a total size of EUR 9835 million.   

105 Presentation 20.5.2015. Introducing the EIF. 

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Table 20 - Overview of the EIF’s mandates – investment in seed and VC 

Mandate 

Funding instrument 

Timeframe 

Amount (EUR) 

Notes 

Risk Capital 
Resources 
mandate (RCR)106. 

EIF  fund  of  funds 
programme 

and 
Not 
to  multi-

2000-2015 
ongoing. 
linked 
annual 
programmes 

EUR 3120m – 2015  
-  planned 
Note 
increase 
in  future 
size to EUR 7bn 

Horizon 2020 
mandate107 

The 
Competitiveness 
and Innovation 
Framework 
Programme (CIP) 
mandate  
COSME mandate 
(Competitiveness 
& SME 
programme) 

JEREMIE mandate 

DFI mandate 

2014-2020 

EUR  450m  –  EU 
funding 
EUR  25m  –  EIF 
funding 

2007-2013 

EUR 550m 

Part of the Single EU 
Equity Financial 
Instrument 
InnovFin 
Venture 
Facility. 

SME 
Capital 

High Growth 
Innovative SME 
Scheme (GIF) 

Equity Facility for 
Growth  

2014-2020 

EUR  690m  –  EU 
funding 

Part of the Single EU 
Equity 
Financial 
Instrument 
Holding 
JEREMIE 
Funds 
Instrument 
(supported  by  ERDF 
Structural Funds). 
Decentralized 
Financial 
Instruments 
(i.e. 
JEREMIE  and  new 
ESIF). 

2007-2013 

EUR 1168.1 

2014-2020 

future 
Planned 
increase  in  size  e.g. 
DVI  from  €150m  to 
€300m. 
Funding  is  not  linked 
to 
multi-annual 
programmes. 
Supplemented  by  a 
commitment  of  EUR 
25m  to  demonstrate 
an 
of 
alignment 
interests 
Operational from 
June 2015  

from 

Operational 
2014 
Successor to the High 
growth  &  innovative 
“GIF” within the CIP. 

Detailed  breakdown 
by  country  /  region 
in 
sub-
previous 
section 
Successor 
JEREMIE 
Fund. 

to 
the 
Holding 

*This figure represents the total i.e. includes EIF funding and national funding. 

3.3.4.2  The EIF’s role in ensuring the supply of capital to the European VC asset class 

The EIF plays a critical role in setting-up national FoF and has provided significant funding support 
through its FoF programme.  Its role has been both  financial, often as a  cornerstone  investor and 
managerial/  technical, since  it has a fund manager role in some  fund of funds, and also provides 

106 RCR is the combination of the former RCM and a mezzanine mandate from the EIB. So effectively the RCM no longer 
exists as an investing mandate since it has been superseded by the RCR. 
107 Since the equity instrument for SMEs within H2020 was only just launched, there is not currently any data available on 
commitments  and  expenditure,  only  on  total  indicative  allocations,  as  indicated  in  the  table  above.  However,  there  is 
some initial monitoring data available on the implementation of the COSME Equity Facility for Growth.  

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advisory  support  to  national  financing  agencies  in  the  set-up  and  operation  of  FoF,  including 
monitoring investments in underlying VC funds. In the following Box, the  efficiency, effectiveness, 
impact and EU added value of the EIF’s role are considered.  

As noted above, the EIF has supported the establishment of 12 national and 2 multi-country FoF to 
date.  In  10  out  of  14  FoF,  the  EIF  is  the  fund  manager.  Through  its  dual  role  as  both  a  major 
cornerstone investor in FoF and as a FoF manager, it has gained considerable expertise in the set-up 
and  operation  of  FoF.    The  EIF  utilises  resources  entrusted  by  third  parties  such  as  the  EIB,  the 
European  Commission,  national  and  regional  authorities  and  has  leveraged  in  investment  from 
other  public  sector  funders  at  the  fund  of  funds  level.    In  a  small  number  of  FoF,  private  sector 
participation by pension funds in FoF has been secured, notably in southern Europe (Portugal, Spain 
and Italy).  

Among the benefits of the EIF’s participation in the European VC market in  general and its role in 
setting up, investing in and managing FoF in particular are:  

  Effective capital deployment  mechanism  –  the EIF is able to disburse EU and  national public 

money to support seed and early-stage VC efficiently and effectively.  

  Pan-European market monitoring capabilities – because the EIF has teams focusing on 
particular  geographic  regions  within  Europe  (e.g.  the  Baltic  States,  south-Eastern 
Europe) and teams focused on specific countries in more mature markets, it is able to 
actively monitor market developments across the entire EU.  

  Technical  capacity  to  make  and  to  monitor  investments  across  EU28  –  the  EIF  was 
regarded by interviewees as being highly  professional and having gained a reputation 
over  15  years  for  managing  FoF  and  co-investments  in  private  equity  VC  funds 
effectively.  

  Generating  leverage  on  EU  public  funds  -  by  investing  in  underlying  VC  funds,  the  EIF  has 
secured  further  investment  in  the  European  VC  asset  class  from  the  private  sector  and  has 
achieved  a  leverage  effect  of  2:1  on  average,  although  for  some  FoF,  such  as  the  Baltic 
Innovation Fund, it is likely to achieve circa 3:1. In 2014, EIF data shows that the EIF invested in 
28 VC funds with an average investment of €10m.108   

  Development of private sector VC infrastructure – although the EIF does not work with private 
fund  managers  at  the  FoF  level,  in  the  past  15  years,  it  has  played  an  important  role  in 
developing  capacity  among  VC  managers  in  countries  where  previously  there  was  little  VC 
activity. The EIF has supported FoF that have invested in new fund managers to structure the 
market and to develop LP capacity through instruments such as JEREMIE, the EIF has invested 
directly alongside managers in countries where the VC market is under-developed. In addition 
helping with the development of capacity and expertise among fund managers, co-investment 
funds  alongside  private  sector  investments  have  also  helped  to  achieved  leverage  on  public 
funds. 

3.3.4.3  Recent developments at the EIF – expansion in the provision of equity capital to 

SMEs 

In  2014,  a  Commission  proposal109  was  published  “on  the  participation  of  the  EU  in  the  capital 
increase  of  the  EIF”.    This  noted  that  the  EIF  sees  scope  for  enhancing  the  value  added  of  its 
activities  in  supporting  innovative  SMEs  by  “creating  additional  investment  capacity  for  private 

108 EIF Annual Report 2014. P. 35 

109 COM(2014) 66 final of 6th February 2014. 

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equity, mezzanine and venture and growth capital”.  The proposal noted that “EIF own resources 
will  be  key  to  support  these  activities  as  well  as  to  ensure  alignment  of  interest  with  other 
mandates, including EU mandates such as Horizon 2020 and COSME, through co-investment”.  

Accordingly, there  has been a recent  increase by the EIB in the total size  of the EIF’s Risk Capital 
Resources  (RCR)  mandate  from  EUR  5bn  to  EUR  7.5bn.  In  order  to  meet  the  challenge  of  an 
increase  in  allocation  to  risk  capital  funding,  the  EIF  needs  to  strengthen  its own  resources  since 
there is a new 5% co-investment requirement to ensure appropriate alignment of interest. In 2014, 
the  EIF’s  shareholders  approved  a  50%  capital  increase  in  the  EIF's  total  authorized  capital  from 
EUR 3 billion to EUR 4.5bn110.   

Looking  ahead,  according  to  the  EIF’s  Corporate  Operational  Plan  2014-2016,  there  will  be  a 
significant  increase  in  EIF  resources  for  investment  in  risk  capital  over  the  next  3  years.  “The 
increase (27%+) is mainly driven by the launch of COSME equity, Horizon 2020 and several new fund 
of  funds  which  will  bring  in  additional  national  or  regional  funds  as  well  as  the  new  DFIs  (the 
instrument  to  follow-up  on  and  to  replace  the  JEREMIE  Holding  Instrument).  ".  The  cumulative 
amount of EIF AUM is expected to reach EUR 14.9bn by the end of 2016. It should be stressed this 
includes guarantees not only equity.  

In  order  to  achieve  alignment  of  interests,  looking  forward,  the  EIF  will  invest  5%  of  its  own 
resources  in  the  fund  of  funds,  co-investment  vehicles  and  programmatic  mandates  that  it 
operates.  

3.3.4.4  Analysis  of  advantages  /  disadvantages  of  EIF’s  role  (and  public  money)  in 

European VC 

The crucial role of the EIF in enhancing the provision of capital to the European VC industry is well-
recognised.  The  counter-cyclical  role  played  by  the  EIF  in  ensuring  that  innovative  start-ups  and 
SMEs  continue  to  have  access  to  capital  during  periods  of  economic  downturn  was  emphasised.  
Although the returns are lower than in the commercial sector, this can be justified on the basis of 
the achievement of key policy objectives,  such as promoting access to risk  finance  for innovation 
and for innovative SMEs, and supporting entrepreneurship. 

However,  a  number  of  stakeholders,  especially  VC  funds,  VC  associations  and  some  national  FoF 
operators  expressed  the  view  that  the  EIF’s  dominant  role  as  a  cornerstone  investor  in  the 
European  VC  market  and  as  a  fund  manager  of  fund  of  funds  raises  longer-term  sustainability 
questions.  A  concern  is  that  it  may  not  be  appropriate  to  have  a  single  public  sector  player 
dominating financing supply for the European VC asset class. The expansion in the EIF’s capital base 
referred to in Section 2.4.3 from EUR 3bn to EUR 4.5bn will be allocated to equity and other forms 
of risk financing. This should help to increase the supply of VC and to boost the EIF’s capabilities in 
making counter-cyclical interventions.  

110 http://www.eif.org/who_we_are/news/2014/capital-increase.htm 

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However,  interviewees  also  said  that  there  were  advantages  in  promoting  greater  diversity  of 
sources  of  investment  in  the  VC  market  and  in.  having  more  than  one  major  source  of  (public) 
funds, because this might encourage greater competition and would be healthy for the European 
VC market overall. 

The EIF’s role as a manager of publicly-backed FoF may not be a problem if FoFs only represent a 
small  share  of  the  VC  market  overall.  According  to  Invest  Europe      data,  this  may  indeed  be  the 
case. However, the EIF is also active in non-FoF schemes, including direct investment in VC funds.  It 
is worth noting however that other national investors in FoFs and operators / managers in FoF such 
as  BPIFrance  also  make  direct  co-investments  in  venture  capital  funds  and  do  not  limit  their 
investments to FoF vehicles alone. 

Among the key issues raised in relation to the impact of the EIF’s dominance of the market by some 
(though by no means all) private sector participants were:  

  The over-dominance of public money. The EIF is a major player in the European VC asset class 

both as a cornerstone investor and as a fund manager with a risk of market distortion.  

  There are consequent risks of “crowding out” effects on the private sector.  According to Invest 
Europe   data, the EIF is present as an investor in at least 25% of the 120 active VCs in Europe.  
Some private FoF managers raised concerns about the EIF’s dominant role in the market and in 
serving  as  both  the  main  cornerstone  investor  and  the  fund  manager  of  most  national  FoF 
structures. It is also a co-investor in many private equity VC funds. 

  A potential concern among the private sector is that if further EU money were to be invested in 
European VC by setting up a FoF programme in addition to the EIF’s equity mandate, this could 
risk further aggravating market distortion. However, this was not found to be a major problem 
because  of  the  close  involvement  of  the  private  sector  who  would  be  able  to  compete  with 
public  sector  fund  managers  to  run  fund  of  funds,  but  also  the  requirement  for  significant 
funding to be raised from non-EU investors (predominantly private but could also be public).  

The need to reduce the European VC industry’s reliance on public sector money.  

  Although lower performance returns and higher levels of risk associated with seed and early-
stage VC mean that continued public sector funding will be needed for the foreseeable future, 
the asset class is arguably overly dependent on the public sector in general, and on the EIF in 
particular. 

  The dominance of public sector money can be interpreted as a reflection of imperfect market 
conditions  under  which  private  investment  remains  scarce.  It  was  never  intended  by  policy 
makers  or  public  sector  officials  to  replace  private  investment  permanently.  Rather,  it  was 
intended as a temporary, counter-cyclical measure.  

  The importance of promoting greater competition among FoF providers and encouraging new 
market  entrants  in  the  European  FoF  ecosystem  was  highlighted,  especially  those  willing  to 
operate on a cross-border or pan-European basis, such as larger US and international players.   

  Greater  diversity  in  supply  and  greater  scale  of  funds  could  help  to  reduce  management 
charges at the FoF level and alleviate the problem of the double layer of fees. Alternatively, by 
selecting only globally-leading FoF managers through enhanced performance returns, this could 
help to justify and demonstrate the added value to investors of paying additional fees. 

  Promoting  further  competition  in  FoF  investing  in  the  European  VC  asset  class  may  also 
enhance the attractiveness of European VC as an alternative asset class. Private FoF managers 
have access to different investor networks than the EIF. 

64 

 
 
 
 
 
 
Policy context & mapping existing provision  

Opportunity costs of the EIF and other public FoF not being able to tap into international pools of 
capital 

The EIF’s public sector shareholders (e.g. the EIB, the EC, national and regional authorities) expect 
the organisation to pursue objectives through its various mandates that extend beyond achieving a 
commercial rate of return.  In some areas/markets where it has different mandates, a lower IRR is 
acceptable  for  the  EIF,  given  that  it  has  been  set  public  policy  objectives  to  achieve,  such  as 
promoting access to finance for innovative SMEs, building a VC infrastructure in under-developed 
markets  and  strengthening  the  technical  capacity  of  fund  managers  (GPs)  and  awareness  levels 
among investors (LPs). 

However,  whilst  willingness  to  accept  a  low  IRR  may  help  to  achieve  public  policy  objectives,  it 
makes  it  more  difficult  to  attract  international  investors  to  the  asset  class,  given  low  historical 
performance  returns.    Accordingly,  although  some  leverage  has  been  achieved  through  the  EIF’s 
FoF  programme  from  the  private  sector  through  securing  investments  from  pension  funds  in 
Southern Europe, international investors such as sovereign wealth funds have been deterred from 
investing in EIF-backed FoF by the low rates of return compared to those to be expected in other 
asset classes.  

However,  balanced  against  this  argument,  a  more  important  barrier  to  investment  by  sovereign 
wealth and pension funds is that of small ticket size. At least in this respect, the larger size of EIF-
backed funds, and the credibility and visibility that EIF involvement as an investor or fund manager 
brings, should have a positive rather than a negative impact. 

The opportunity costs of missing out on international investment could be overcome by setting up a 
pan-European  FoF  programme  operating  separately  from  the  EIF’s  FoF  programme  that  would 
adopt a more commercial approach and attract globally-leading FoF managers to operate the FoF 
and to attract untapped international capital.   

3.4  Fund of funds - investing in European VC  

A number of FoF have  been set up by the  EIF and national FoF operators  in  the last 15 years  to 
address  market failures  in the  provision of VC by investment stage (e.g. seed, early-stage) and in 
particular  geographies,  where  the  VC  market  was  under-developed,  such  as  Central  and  Eastern 
Europe  and Southern Europe.  In addition,  national  and regional VC funds  have  been set up, for 
instance, funded through the Structural Funds. The two main types of publicly-backed fund of funds 
are:  

  The EIF’s FoF programme – the EIF has established and / or been a cornerstone investor in a 
number of fund of funds, such as the UK FTF – (UK Future Technologies Fund), MDD (Mezzanine 
Dachfonds  für  Deutschland),  the  Dutch  Venture  Initiative  (DVI),  the  Polish  Growth  Fund  of 
Funds (PGFF) and the Baltic Innovation Fund (BIF).  

  National  FoF  operators  –  such  as  the  British  Business  Bank,  BPIFrance  etc.  which  have 

established FoF vehicles, either with the support of the EIF, national government or both. 

  Private FoF operators – although some fund managers have exited the market and/ or instead 
concentrate on later-stage private equity, there remain top-performing FoF in the market. 

There are advantages in having a combination of public and private sector FoF managers’ active in 
the  European  VC  market.    FoF  managers  with  public  sector  backing  play  an  important  role  in 
intervening in areas of the market where there are supply-side bottlenecks. However, the presence 
of  private  FoF  managers  in  the  market  is  also  helpful  since  many  top-performing  VC  funds  are 
reluctant to be seen to be accepting public funding, given their commercial orientation and ethos.  

A detailed mapping and benchmarking assessment of existing FoF has been undertaken as part of 
this study. The purpose was to: 

65 

 
 
 
 
 
 
Policy context & mapping existing provision  

 
Identify the size of public intervention at EU and national level through FoF mechanisms. 
  Analyse key issues relating to the set-up and design, operation and to the extent data was 

available, the performance of EIF and national fund of funds (including exits).  

  This informed the assessment of the possible scope for a pan-European FoF programme 
and the configuration of suggested alternative models for setting up such a programme.  
  However, it should be noted that whilst data and information on key parameters relating to 
the set-up and operation of FoF (e.g. duration, size, investment sources, investment period, 
it was only possible to obtain partial performance data. 

Reference should be made to the following sections in particular, which draw on the benchmarking 
assessment of existing FoF:  

  Supporting document 1  

o  Appendix B - case studies focused on EIF-backed fund of funds, such as the Baltic 
Innovation Fund, the Polish Growth Fund of Funds and other international fund of 
funds programmes such as VCAP in Canada. 

o  Appendix E – considers performance data (to the extent that data is available on 

national and EIF FoF performance). 

  Supporting document 2 – implementation issues relating to the set-up and operation of a 

pan-European FoF programme.  

3.4.1.1  The EIF’s fund of funds programme 

The  EIF  has operated  a  FoF  programme  since  the  mid-2000s,  which  has  recently  been  expanded. 
The EIF’s FoF programme is not linked to a multi-annual programming period, but is instead funded 
through  the  Risk  Capital  Resources  mandate).  According  to  the  most  recently  available  data,  the 
current size of the EIF’s FoF programme is over €3.1 billion (EUR 3120m). A summary of the EIF’s 
FoF activities is provided below:  

Table 21 - Total size of EIF FoF programme 

Fund of Funds (name and country) 

Size in EUR 

Baltic Innovation Fund 
ERP Venture Capital Fund Investments (DE):  
LFA-EIF (DE) 
MDD (DE)  
NEOTEC (ES)  
Dutch Venture Initiative - DVI (NL)  
Fondo Italiano  Investimenti (IT) 
Luxembourg Future Fund (LU) 
Polish Growth Fund of Funds - PGFF (PL):  
Portugal Venture Capital Initiative - PVCi (PT)  
Istanbul Venture Capital Initiative  - iVCi (TR) 
UK Future Technology Fund (UK) 
Social Innovation Fund (EU28) 
Total 

EUR 100 m 
EUR 1000m 
EUR 50m 
EUR 200m 
EUR 183m 
EUR 150m 
EUR 600 m 
EUR 150 m 
EUR 90m 
EUR 111m 
EUR 160m 
EUR 274 m / GBP 200 m 
EUR 52 m 
EUR 3120m* 

Managed by EIF 
Yes 
Yes 
Yes 
Yes 
Yes 

Yes 

Yes 
Yes 
Yes 
Yes 

Source  –  EIF,  2015.  Note  -  this  figure  represents  the  total  i.e.  includes  EIF  funding  and  national 
funding. 

66 

 
 
 
 
 
 
 
 
 
 
Policy context & mapping existing provision  

The data in the table  above  includes  not only EIF funding but  also co-financing raised from other 
national FoF operators and other national funding sources, such as national financing agencies and 
national state banks (e.g. INVEGA in Lithuania, KfW in Germany). There is also a plan to increase the 
size  of  some  existing  FoFs  such  as  the  DVI  (Netherlands),  which  is  expected  to  be  increased  to 
€300m target size (currently €150m) through partnering with the Dutch region. There has been a 
recent increase to EUR 2.5bn in the increase of the EIF’s RCR mandate, which through the EFSI will 
provide new capacity to invest into private equity /venture capital funds. The EIF already supports 
500 venture and growth funds.  

Data on the total size of the fund could not be obtained consistently for all non-EIF supported FoF 
through the benchmarking exercise. However, a conservative minimum estimate based on the data 
available puts the overall size of such national FoF at € 4,471 million. 

The EIF is able to invest a maximum of up to 50% in FoF, although it typically aims to represent no 
more than 40% of total FoF size in order to avoid being too dominant in the funding structure. Still, 
the  EIF  portfolio  covers  80%  of  all  EU  VC  funds.  EIF-backed  FoF  invest  in  both  generalist  and 
specialist  private  sector  VC  funds  that  have  the  expertise  and  track  record  to  invest  directly  in 
innovative  businesses.  In  addition,  the  EIF  also  makes  direct  co-investments  together  with 
successful VC fund managers in order to help increase the supply of VC. 

3.4.1.2  National fund of funds operators  

National FoF operators also play an important role in ensuring the supply of equity and other forms 
of  risk  capital  financing  support  for  innovative  SMEs  through  fund  of  funds  investments  in 
underlying  VC  funds  and  through  direct  co-investments.  There  are  a  number  of  national  fund  of 
funds such as those belonging to EVFIN, an informal network consisting of a group of national FoF 
operators111.  

Most  national  fund  of  funds  receive  funding  support  from  the  EIF.  Indeed,  a  small  number  of 
national FoF, such as KfW and BPIFrance are shareholders in the EIF. In some instances, such as the 
UK’s  Future  Technology  Fund  and  the  Baltic  Innovation  Fund,  the  EIF  is  not  only  a  cornerstone 
investor but also the fund manager. Some data in respect of the size and scope of national FoF was 
provided in the previous sub-section on the EIF’s FoF programme  (the data includes  national and 
EIF financing). 

However, not all have national FoF operators were established with EIF funding. A non-exhaustive, 
illustrative list of publicly-backed FoF working without EIF funding is provided below: 

Table 22 - Examples of publicly-backed national FoF that operate without EIF support 

Country 

Name of fund 

AT 

AT 

BE 

DK 

EL 

ES 

AWS Mittelstandsfonds 

Aws ‘Venture Capital Initiative’ 

Arkimedes2 

Danish Growth Fund 

TANEO  

INNVIERTE 

Size in million 
EUR 

80  

211.1  

750  

140  

234.5 

111 EVFIN is comprised of the following national operators: AWS (Austria), Bpifrance (France), British Business Bank (UK), 
Caixa  Capital  (PT),  Enterprise  Ireland  (Ireland),  Finnish  Industry  Investment  (Finland),  KFK  (Krajowy  Fundusz  Kapitałowy 
(PL), MFB Invest (HU), New Economy Development Fund (TANEO) (Greece), PMV (Belgium) and SRIW (Belgium). 

67 

 
 
 
 
 
 
 
                                                           
Policy context & mapping existing provision  

FI 

FI 

FI 

FI 

FI 

FR 

HR 

Tekes Venture Capital Ltd 

Finnish Industry Investment Ltd 

30 per annum 

574 

Finnish Industry Investment Fund of Fund Growth I & II 

127 & 130 

Veraventure Ltd 

Sitra Ventures 

Sino-French Fund 

VENCRO 

150 

4.6 

3.4.1.3  Private fund of funds 

Although as noted earlier, many private FoF managers exited the market during the economic and 
financial  crisis  of  2007-2009,  a  number  of  large-scale  private  FoF  managers  remain.    Among  the 
largest private sector FoF based in Europe include AlpInvest partners (NL), Ardian (FR), LGT Capital 
Partners  (CH),  Pantheon  Ventures  (UK),  Capital  Dynamics,  Partners  Group  and  Horizon21 
Alternative  Investments  (all  CH),  SL  Capital  Partners  (UK),  Allianz  Private  Equity  Partners  (DE), 
ADVEQ (CH) and SVG Capital (UK). 

Among the advantages of having private sector FoF managers operating FoF within the European 
VC ecosystem are:  

  Professional and commercially-oriented.  
  Often highly experienced in investment selection – a specialist skills set. 
  Ability to attract  private  capital -  it is quite  difficult for publicly-backed FoF that follow  public 
policy objectives to pursue levels of returns acceptable to commercial investors, irrespective of 
the performance metrics used (e.g. IRR or investment multiples). 

  Access to international investor networks.  
  Access  to  high-quality  deal  flow  -  there  is  a  mutually  symbiotic  relationship  between  top-

performing FoF managers and top-quartile performing VC funds. 

Previous research112 using Monte Carlo simulations with real VC fund return data has modelled the 
return and risk profiles of FoFs and has established that the risk of a FoF losing capital was found to 
be small (<1%) provided that a minimum of 20 VC funds are invested in. Typically, a large private 
FoF  operating  in  Europe  will  therefore  invest  in  between  20  and  30  individual  GPs,  in  order  to 
spread risk and ensure a diversified portfolio, whilst maximising returns. 

112 See Weidig and Mathonet (2004, “The risk profiles of private equity”) and Risk in Private Equity - New insights into the 
risk of a portfolio of private equity funds - BVCA and Montana Capital Partners, 2015 

68 

 
 
 
 
 
 
 
 
 
 
 
 
                                                           
Options analysis & key issues 

4.  OPTIONS ANALYSIS AND KEY ISSUES 

Section 4 identifies and analyses the relative advantages and disadvantages of the different options 
and sub-options. In particular, this Section includes: 

  A typology of FoF and an assessment of their relative advantages and disadvantages;  
  The identification of options and sub-options under consideration;  
  A summary of stakeholder views on the different options/ sub-options under consideration; 
  An assessment of the main risks and possible mitigation measures;  
  An assessment of the feasibility of setting up a pan-European FoF (or a FoF programme);  
  A synthesis of findings;  
  The  identification  of  the  preferred  policy  option  and  the  rationale  for  the  selection  is 

outlined; and 

  A  concise  outline  of  the  set  up  and  operation  as  well  as  state  aid  and  competition  issues 

related to the implementation of the preferred option.  

Note: A more extensive review of set up and operational issues and of state aid and competition 
considerations  is  provided  in  the  supporting  document  “Assessment  of  Implementation  Issues  – 
Setting up a pan-European FoF Programme”. 

The identification of options and sub-options draws on an extensive assessment of existing FoF and 
their modus operandi, which was part of the benchmarking assessment (see Appendix E).  

4.1  Typology of funds of funds   

A  typology  of  FoF  was  developed  to  inform  the  analytical  framework  and  the  modelling  of 
alternative  scenarios  for  a  possible  future  pan-European  FoF  programme.  Four  main  types  of  FoF 
that invest in underlying seed or VC funds were identified through the benchmarking assessment:  

Table 23  - Alternative typologies of funds of funds 

Model type 

Description 

Structure 

Leverage effects 

Model  1  –  Publicly 
supported FoF. 

investor 

Cornerstone  public 
(e.g.  EIF, 
sector 
BPIFrance),  usually  with  additional  public  investors. 
Usually no private investor participation at FoF level, 
only  through  underlying  funds.    Target  IRR  (5%)  is 
below what would be commercially acceptable, given 
that  public  policy  objectives  will  apply  (e.g.  support 
for  specific  geographic  markets  during  the  earlier 
investment stages). 

Public 
cornerstone 
investor 

Fund 
manager 
either  public 
or private. 

Underlying 
funds only 

VC 

Model  2  -  Public-
private FoF 

Similar  to  model  above  with  a  cornerstone  public 
investor  but  with  private  investors  at  the  FoF  level 
(e.g.  an  EIF  FoF  in  Portugal  has  attracted  pension 
funds to invest).  

Public-
private 

level  and 
VC 

FoF 
underlying 
funds level 

Although  not  a  common  model,  there  are  examples 
of  “private-public  partnerships”  where  private  FoF 
managers established a FoF (e.g. Arkimedes/ BE). 

Model  3  -  Private 
equity FoF. 

Large FoF may invest a small percentage of their total 
AUM  in  the  European  VC  asset  class.  Given  the  exit 
from  the  market  of  many  GPs,  private  equity  groups 
concentrate  their 
in  the  top  20-30 
investments 
private  VC  funds  in  Europe.  These  VC  funds,  such  as 

Private 

No  leverage,  but 
participation  by 
PE  and  high  IRR 
achieved 
enhances 

the 

69 

 
 
 
 
 
 
 
Options analysis & key issues 

Model type 

Description 

Structure 

Leverage effects 

Index  Ventures,  Wellington  Partners,  have  access  to 
the  best  deal  flow  and  typically  achieve  a  high  IRR 
(20%+). 

supply  of  capital 
to European VC. 

Model  4  –  Hybrid 
model  –  combining 
a  public-private  FoF 
approach  with  a  co-
investment 
fund 
model. 

The federal-level VCAP FoF programme in Canada has 
incorporated  a  co-investment  fund  dimension  into 
their FoF model to enhance overall returns.  VCAP has 
provided  cornerstone  funding  and  supported  the 
setting up of four privately-led fund of funds to date. 

Public-
private 

level  and 

FoF 
through 
underlying 
funds 

VC 

4.2 

Identification of options  

A number of options and sub-options were identified in response to the policy objectives described 
in section 2.3, as detailed in the table below: 

Table 24 - Options identification (overview) 

Definition 
options 

of 

Description and sub-options (where appropriate) 

Option 1 – No further 
action at EU level  

Option  2  –  Increase 
funding  for  existing 
EU-financed 
equity 
instruments  and  /  or 
the EIF’s existing fund 
of funds programme.  

Option  3  –  The  EU 
provide 
could 
additional 
co-
for 
investment 
existing national fund 
of funds to encourage 
them  to  set-up  cross-
border FoF 

Option  4  –  Set  up  a 
pan-European  public-
private 
of 
Funds. 

Fund 

The no further action option provides a “counterfactual”. 

There are already a number of equity instruments being implemented in the 2014-2020 
period (which build on earlier equity schemes from 2007-2013. The sub-options include.   

 

 

 

 

 

Sub-option 2.1 – increase funding for existing equity instruments e.g. the Single EU 
Equity Instrument under the Horizon 2020 and COSME programmes.  

Sub-option  2.2  –  increase  funding  to  strengthen  capital  available  to  the  EIF  to 
expand the size and scope of its FoF portfolio.  

Sub-option  2.3  –increase  funding  for  other  pilot  equity  instruments  for  innovative 
SMEs (e.g. pilot facility for technology transfer, Fast Track to Innovation Pilot). 

Sub-option  3.1  -  EU  to  invest  in  established  national  (public)  FoF  operators  to 
encourage  them  to  cooperate  with  national  FoF  in  other  countries  through  cross-
border, multi-country FoF.  

Sub-option  3.2  –  EU  to  invest  in  setting  up  a  FoF  mechanism  to  promote  cross-
border  VC by  building on  existing regional  VC  funds  funded  through  the  European 
Structural and Investment Funds that do not currently operate cross-border.  

 

Sub-option 4.1 - set up a pan-European FoF programme.  

This would consist of several public-private FoF in the first generation (4-5) and would be 
operated by private or public sector FoF managers selected following a call for proposals.  

 

 

 

Sub-option 4.2 - set up a single pan-European public-private FoF.  

Sub-option 4.3 - set up a pilot FoF to test the feasibility of going ahead with a public-
private pan-European FoF programme.  

Sub-option  4.4  –  provide  EU  support  through  a  FoF  mechanism  for  new  VC  funds 
still at the investor-search stage. 

The different options/ sub-options are not mutually exclusive. Subject to funding availability, there 
would  be  nothing  to  prevent  a  combination  of  options  /  sub-options  from  being  implemented  in 
parallel, as part of a package  of measures.  For instance,  a pilot  for a public-private,  pan-European 

70 

 
 
 
 
 
 
 
Options analysis & key issues 

FoF  could  be  supported  at  the  same  time  as  boosting  EU  support  to  co-finance  national/  regional 
FoF.    

In  relation  to  Options  3  and  4,  it  can  be  noted  that  a  number  of  different  proposals  have  already 
been made by Invest Europe (formerly EVCA), EVFIN and other actors. In particular:  

o  EVCA's  views113  on  the  general  design  principles  for  a  VC  FoF  have  been  set  out  in  position 
papers 
include  experienced  private-sector 
management, using incentives to attract private-sector investors, investing across all industry 
sectors (and not by theme), and investing in VC funds with a high target allocation of EU firms. 

in  November  2014.  These 

in  2011  and 

o  A group of national VC operators and long-term investors, EVFIN114, has developed a proposal 
for pooling the capital and expertise of member institutions (mostly in the public sphere) in a 
€250  million  fund.  Such  a  FoF  would  aim  to  build  up  a  portfolio  of  15  to  20  VC  funds,  and 
would  invest  on  equal  terms  with  other  market-oriented  investors  in  the  expectation  of 
attracting  funds.  Its  focus  would  primarily  be  on  cross-border  VC  funds  managed  by  both 
established and newly created management companies, with the emphasis on teams located 
in the countries of EVFIN members. It would mainly target early-stage funds.  

In the table on the following page,  an assessment of the relative advantages and disadvantages of 
the different options is provided, before looking more closely at stakeholder feedback: 

113 See http://www.investeurope.eu/policy/key-topics/promoting-the-industry/pan-eu-funds-of-funds/  
114  
AWS  (Austria),  Bpifrance  (France),  British  Business  Bank  (UK),  Caixa  Capital  (Portugal),  Capital  Dynamics  (UK), 
Enterprise Ireland (Ireland), Finnish Industry Investment (Finland), KFK (Krajowy Fundusz Kapitałowy (Poland), MFB Invest 
(Hungary),  New  Economy  Development  Fund  (TANEO)  (Greece),  PMV  (Belgium),  SRIW  (Belgium).  Membership  as  on  20 
March 2013. 

71 

 
 
 
 
 
 
 
                                                           
Options analysis 

Table 25 - the advantages and disadvantages of different options for a FoF 

Definition of options 

Sub-options 

Advantages  

Disadvantages 

 None  

Option 
–  No 
1 
further  action  at  EU 
level 
(counterfactual). 

Option 2  – Increase EU 
funding 
for  existing 
equity-based  financial 
for 
instruments 
innovative SMEs  

Option  3  –  The  EU 
could invest in existing 
publicly-backed 
national  and 
regional fund of funds 

/  or 

 Sub-option  2.1  -  increase  funding 
for  the  Single  EU  Equity  Financial 
Instrument. 

 Sub-option  2.2  –  increase  funding 
the  EIF’s  FoF 

strengthen 

to 
portfolio.  

 Sub-option  2.3  -  increase  funding 
for  other  pilot  equity  instruments 
for innovative SMEs 

national 

 Sub-option  3.1  -  EU  investment  in 
FoF 
existing 
operators  through  cross-border, 
multi-country  or  pan-European 
FoF.  

public 

 The EIF is recognised as a professional and experienced 

 Market  domination  concerns  and  risk  of  absence  of  competition  as  a 

FoF manager. 

driver to help attract the private sector back to VC 

 Some investors are reassured by the EIF’s presence as a 

cornerstone investor.  

 Stimulate uptake of equity capital investment by  start-
in  EU  countries  where  there  was 

ups  and  SMEs 
previously a lack of VC and market failures.  

 Promote  economic  development,  growth  and  jobs  in 

less developed regions.  

 The  EIF supports  several  €100m+ VC  FoF  in  MS where 
there  are  recognised  market  failures  /  supply-side 
bottlenecks  and  is  also  active  in  more  mature  VC 
markets. 

 There  are  already  a  number  of  equity  instruments 
being  implemented  by  the  EIF  in  2014-2020,  such  as 
the  Single  EU  Equity Financial  Instrument  (COSME  and 
Horizon 2020). 

 Since these are already established, it could arguably be 
for  existing 

to  boost 

funding 

more  efficient 
instruments.  

 There is sufficient experience of implementing existing 
the  GIF 

to  build  upon 

EU  equity 
implemented in 2007-2013. 

instruments 

 Stimulate  increased  cross-border  provision  of  VC  at 

national level. 

 Support  less  developed  markets  and  build  the  VC 

ecosystem. 

 Address  problem  of  lack  of  critical  mass  and  the  need 

for increased average fund size  

 Establish a single FoF as a Dedicated Investment Vehicle 
could  be  viable  if  it  operated  as  a  pool  of  additional 
funding to which national FoF operators could apply. 

 The EIF is already one of the biggest players in the European VC market.   
 The EIF has provided extensive backing for existing successful VC funds but 
may  be  less  agile  and  quick-moving  in  spotting  emerging  talented  GP 
managers. 

 Other investors may be deterred by the presence of the EIF (and/ or other 
public sector investors) as a cornerstone investor and FoF manager. They 
may be more likely to invest in a privately managed FoF. 

 It  may  be  difficult  to  make  programmatic  changes  mid-way  through  the 
period given that the budget for particular equity instruments has already 
been agreed. 

 Many  instruments  are  at  an  early  stage  in  implementation  and  there  is 
unlikely to be sufficient time to evaluate these. This is an issue for the two 
pilots that are as yet untested115. 

 Although the EIF’s involvement in FoF is welcomed by market participants 
in  addressing  market  failures  in  particular  geographies,  the  EIF  has  a 
dominant market position. If it were to be appointed to manage a single 
pan-European  FoF  programme  as an  entrusted  entity,  this would  further 
cement its position and make it difficult to attract the private sector. 

 Although national FoF play an important role, if the objective is to attract 
the private sector back to European VC, increasing the supply of seed and 
VC through public provision alone may not achieve this aim. 

 Concerns among private sector that investment selection criteria  may be 
too  constrained  by  national  political  considerations  rather  than  purely 
focused on generating optimal investment returns. 

Sub-option  3.2  –  EU  investment  in 

 Stimulating  increased  cross-border  provision  of  VC  at 

 Many regional VC FoF have not generated successful returns. 

115  The  Pilot  Facility 
http://ec.europa.eu/programmes/horizon2020/en/h2020-section/fast-track-innovation-pilot  

for  Technology  Transfer 

(http://www.2020-horizon.com/Technology-Transfer-Financing-Facility-Pilot-i2120.html)  and 

the  Fast  Track 

to 

Innovation  Pilot 

- 

72 

 
 
 
 
 
 
 
 
 
 
 
 
                                                           
Definition of options 

Sub-options 

setting  up  new  regional  VC  FoF, 
building on  existing regional VC funds 
not yet operating cross-border. 

Option  4  –  Set  up  a 
pan-European 
seed 
and  venture  capital 
Fund of Funds. 

Sub-option  4.1 
-  set  up  a  FoF 
programme  to  support  4-5  individual 
FoF in the first generation. 

Sub-option  4.2  -  set  up  a  single  pan-
European public-private FoF following 
a Call for Expressions of Interest. 

Sub-option  4.3  -  set  up  a  pilot  FoF  to 
test the feasibility of going ahead with 
a more significant scale public-private 
pan-European FoF.  

Sub-option  4.4  –  EU  support  for  new 
VC  funds  still  at  the  investor-search 
stage  to  encourage  private  FoF  back 
into  European  VC  (a  “gap  funding” 
approach). 

Options analysis 

Advantages  

regional level 

 Addressing  problem  of  lack  of  critical  mass  and  the 

need for increased average fund size. 

 Some  regional  authorities  are  already  beginning  to 
identify  benefits  in  cooperating  together  cross-border, 
as illustrated by the Vanguard Initiative. 

 Enhance the supply of seed and VC to VC funds and in 

turn to innovative, high-growth firms. 

 Achieve  a  double  leverage  effect  at  the  FoF  and 

underlying VC funds level. 

 Promotion  of  greater  competition  and  diversity  of 

supply at the FoF level.  

 Attract  private  sector  investors  back  to  the  European 
VC asset class (may necessitate asymmetric returns). 

 Attract private FoF managers. 

Disadvantages 

 Concerns  among  private  sector  that  investment  selection  criteria  are 
constrained  by  geographic  and  political  considerations  rather  than 
investment returns potential  

 Lower prospective investment returns may deter investors. 

 The  EIF  model  is  to  co-invest  in  a  FoF  together  with  other  public  sector 
investors  and  to  work  with  the  private  sector  by  investing  in  underlying 
funds and through co-investments.  

 Asymmetric  returns  may  be  needed  to  attract  the  private  sector.  The 
extent  of  stakeholder  acceptance  of  an  asymmetric  returns  structure  is 
uncertain. 

 Enhance the supply of seed and VC to VC funds and in 

 If  managed  by  the  EIF,  a  question  mark  as  to  how  this  could  be 

turn to innovative, high-growth firms. 

differentiated from existing EIF FoF provision. 

 If the objective were to ensure that VC is more widely 
available across EU28, then a new mechanism could be 
put in place to distribute EU funding to VC funds across 
the EU, including in under-served markets. 

 Supporting  a  fully-fledged  FoF  has  some  reputational 
risks  for  the  EC.  It  has  not  previously  set  up  such 
schemes.  

 A  piloting  approach  e.g.  rolling  out  one  or  two  FoF  in 
the  first  year  to  gain  experience  in  the  initial  set-up 
phase  and  to  fine-tune  the  FoF  programme’s  design 
could help to overcome this problem.  

 A “gap funding” approach has been successful in other 

areas of EU spending (e.g. ERDF). 

 Supporting  new  managers  by  giving 

the 
opportunity 
funds  could 
to  manage  micro  VC 
strengthen the European VC ecosystem’s sustainability. 

them 

 If  managed  by  a  single  private  FoF  manager,  would  have  less  impact  in 
promoting  competition  and  diversification  among  market  participants  in 
running FoF specialising in the European VC asset class. 

 The  EIF  and  EBRD  already  provide  funding  to  address  supply-side 
bottlenecks  in  less  developed  markets  (and  in  some  countries,  also  help 
with capacity building across the VC eco-system). 

 Experience  in  the  US  suggests  that  it  is  not  realistic  to  tackle  geographic 

market failures. 

 The duration of a publicly-backed FoF is between 10 and 16 years. Given 
the  J  Curve  factor  inherent  in  FoF,  a  piloting  approach  may  not  yield  a 
definitive response as to the success or failure of the approach for 10-15 
years. 

 The pilot option is generally regarded as unrealistic by stakeholders.  

 Higher risks for the EU in supporting prospective FoF managers without a 

previous track record in managing FoF  

 A  possible  mitigation  measure  would  be  to  support  FoF  management 
teams that include a combination of those that have previously managed 
FoF and those that have only managed VC funds).  

 Higher risks associated with investing in FoF at the investor-search stage. 

73 

 
 
 
 
 
 
 
 
 
 
 
 
 
Options analysis & key issues 

4.3  Stakeholder views on policy options  

4.3.1 

Introduction  

In  this  section,  we  analyse  stakeholder  feedback  on  the  alternative  options  and  sub-options.    During 
Phase 2, interviews were carried out with 105 stakeholders across the EU and internationally to ascertain 
views on the issues raised through the study.  Stakeholder views were then corroborated through further 
desk  research116  117.  Feedback  is  now  provided  from  stakeholders  on  the  different  options  and  sub-
options.  Feedback was received on the different options and sub-options from a representative sample 
of VC and FoF managers through a total of 105 interviews. 

4.3.2  Option 1 – No further action at EU level (counterfactual) 

There  were  different  views  among  market  participants  in  relation  to  maintaining  the  counterfactual 
option (status quo). The key arguments made in favour of not taking any further action, i.e. the status 
quo option, can be summarised as follows: 

  The  EIF  already  de  facto  acts  as  a  pan-European  FoF.  Any  further  EU  intervention  risks  duplicating 

existing instruments without adding discernible value. 

  There  is  no  market  failure  but  rather  low  investment  in  European  VC  reflects  problems  in  the 
European  VC  ecosystem.  The  problem  therefore  is  not  a  lack  of  funding  but  that  the  framework 
conditions need to be improved. 

The key points made in favour of taking further action are: 
  There  is  a  clear market  failure  when  VC  investment  is  decreasing  while  returns  are  improving.  This 

makes public intervention in one form or another necessary to reinvigorate the market.  

  The  market  needs  to  be  diversified  given  the  current  dominance  of  the  EIF  both  as  a  cornerstone 

investor and FoF manager. 

4.3.2.1  The public sector - already active in addressing market failures  

Even without a new European initiative, some stakeholders noted that there is already a significant range 
of public funding schemes for European VC.   

Stakeholders confirmed that many private sector investors and VC fund managers have already exited the 
market due to poor performance. Public sector actors, notably the EIF and national FoF operators, have 
stepped in to ensure that innovative start-ups and SMEs continue to have access to equity capital.  It was 
argued by some interviewees that there is already sufficient public sector provision of seed and VC, since 
for instance, the EIF has already  backed 13 FoF in countries such as the Baltic States,  the Netherlands, 
Poland, Turkey and the UK. Several interviewees noted that the EIF and EBRD have been active through a 
combination  of  support  for  setting  up  new  fund  of  funds  and  through  direct  co-investment  in  VC  in 
addressing  under-provision  in  particular  market  geographies  where  the  VC  eco-system  is  under-
developed,  such  as  the  Baltic  States,  Central  and  Eastern  Europe  and  Southern  Europe.  Some 
stakeholders expressed the view that such measures were more than sufficient, and suggested that the 
main problem was not one of lack of financing supply, but rather lack of high-quality start-ups and SMEs 
with  world-class  growth  potential.  Conversely,  others  suggested  that  there  remains  a  need  for  further 

116  Accelerating  Innovation  &  Delivering  Growth:  Using  the  Jobs,  Growth  and  Investment  Package  to  Attract  Private  Sector 
Investors to the European Venture Capital Industry, EVCA, November 2014 
117 The case for a European venture capital fund for innovative companies, French non-paper 

74 

 
 
 
 
 
 
                                                           
Options analysis & key issues 

investment in European VC, and in particular, to take steps to ensure that the private sector returns to 
the market.  

In addition, national funding schemes have been set up in some EU countries to ensure supply of equity 
finance  for  start-ups.  In  France,  for  instance,  an  interviewee  mentioned  that  the  national  seed  capital 
fund set up, the  Fonds  national d'amorçage (FNA)118,  has capital of €600m, which is very large  by seed 
fund  standards.  In  the  UK,  the  British  Business  Bank  set  up  the  UK  Innovation  Investment  Fund  (UKIIF) 
with €280m of government money as a counter-cyclical measure. 

In addition, some interviewees observed than in EU countries with a less well developed VC eco-system, 
many regional venture capital initiatives have been supported, utilising EU Structural Funds. In Lithuania 
and  Bulgaria,  for  instance,  stakeholders  noted  that  ERDF  funding  has  been  used  to  promote  access  to 
seed  capital  through  the  JEREMIE  holding  fund.  Other  countries,  such  as  the  UK  and  France  have  also 
made extensive use of ERDF funding to establish regional VC funds, albeit with mixed success, according 
to evaluations of these funds. 

4.3.2.2  Private  sector  and  industry  association  views  on  the  adequacy  of  VC  provision  in 

Europe 

The role of private individuals in providing funding through business angel activity was also highlighted by 
business  angel  associations  interviewed.  In  the  UK,  Germany  and  France,  there  is  a  vibrant  angel 
community119. However, a problem with angel financing is that is it not that well-developed in many EU 
countries  (some  studies  have  estimated  the  UK  share  of  angel  financing  at  50%).  Nevertheless,  an 
interviewees in Bulgaria mentioned that angels played a significant role in providing seed funding in the 
€20000  -  €50000  bracket.  Business  angel  associations  emphasised  that  although  institutional  investors 
are  under-represented  in  seed  and  early-stage  VC,  it  could  be  argued  that  such  investment  was  pre-
institutional anyway.  

Some GPs interviewed did not view there as being a supply-side problem on the basis of the data alone 
which  shows  a  reduction  in  the  number  of  private  sector  market  participants.  High-performing  GPs 
continue  to  be  profitable,  whereas weaker  GPs  have  exited  the market.  Since  the  EIF  and  other  public 
actors  have  already  stepped  in  to  address  market  failures  in  the  provision  of  seed  and  early-stage  VC, 
some GPs felt that further EU public intervention was unnecessary, unless there was clear differentiation 
from existing public provision. 

A related concern was that an increase in EU funding could lead to “crowding out” effects (e.g. mentioned 
by a German public bank representative, a Dutch investor and a number of VC fund managers). However, 
as explained in Option 4.1, the key differentiator of a pan-European FoF initiative is that it would seek to 
attract  significant  private  sector  capital  and operate on  a  more  commercial  basis,  rather  than  replicate 
existing EIF and other publicly backed FoF provision. 

A VC stakeholder from Germany argued that increasing the supply of VC was by itself insufficient and that 
financing  scarcity  is  not  necessarily  a  problem  since  it  means  that  only  truly  excellent  business  ideas, 
where start-ups have global potential and are scalable get funding. “Financing scarcity could paradoxically 
lead to greater competition and the very best start-ups will always get funding”. This was however a view 
shared by only a minority of stakeholders. 

118The FNA is operated by BPIFrance on behalf of the French government - http://www.bpifrance.fr/Bpifrance/Nos-
metiers/Fonds-propres/Les-fonds-de-fonds/Fonds-national-d-amorcage-FNA 
119 See for example http://www.seedcapitaluk.co.uk/seed-capital-partners.php  

75 

 
 
 
 
 
 
                                                           
Options analysis & key issues 

4.3.2.3  Arguments against maintaining the “status quo” approach 

Stakeholders, such as Invest Europe, private equity FoF managers and some VC managers took the view 
that the market is not working effectively because the public sector continues to dominate the market, 
with the EIF being overly present in some markets. This was also echoed by some investors interviewed. 
Without further steps to structure the market and to significantly increase average FoF and VC fund size, 
there is a risk that the private sector will not return to the asset class. This could result in considerable 
“missed  opportunities”  in  terms  of  lost  monetary  benefits  from  not  capturing  the  economic  and 
employment effects of later-stage VC in instances where high-growth European early-stage growth firms 
relocate to the US before full value can be realised. Even if investors om European VC secure successful 
and profitable exits, the firms exited are still growing and later stage and buy-out investors will capture 
most of the upside (e.g. through MBOs, LBOs and IPOs, all of which are more active market segments in 
the US compared with the EU). 

Some interviewees noted that although the EIF is highly professional in setting up and operating FoF, it is 
already  very  dominant  within  the  market.  There  was  broad  support  for  the  notion  that  whilst  the  EIF 
should  continue  to  play  an  important  role  in  future,  further  competition  would  be  healthy  for  the 
European  VC  ecosystem  overall.  However,  there  were  divergent  views  as  to  whether  the  EU  should 
support  diversity  in  provision  by  setting  up  a  pan-European  national  FoF  scheme  (Option  2)  or  should 
promote  competition  at  the  FoF  level  by  encouraging  the  emergence  of  private  pan-European  FoF 
operators through a public-private partnership approach which would then ensure three different types 
of FoF operators (the EIF, national publicly funded operators and the private sector).  

A  further  argument  made  was  that  the  EIF  is  already  one  of  the  biggest  players  in  the  European  VC 
market.  If the EIF remains the only publicly funded pan-European FoF player in the EU able to invest in 
cross-border FoF, it may become increasingly difficult to attract the private sector back to European VC in 
future  given  market  entry costs.  The  discussions with  national  FoF  operators  confirmed  that  presently, 
although  the  underlying  funds  in  which  they  invest  have  investment  portfolios  of  SMEs  in  different 
countries, the  FoF structures  themselves  are national in character. Indeed, although the EIF has a pan-
European remit and monitoring reach, the FoF that it has set up to date have been national rather than 
cross-border, with the one exception of the Baltic Innovation Fund (est. 2013).  

Some stakeholders suggested that rather than setting up entirely new funding schemes, it would be more 
appropriate to encourage the Member States to take further steps to improve framework conditions (for 
instance,  encouraging  Member  States  to  set  up  a  regulatory  framework  at  national  level  conducive  to 
supporting FoF, replicating the tax breaks in France and the UK for individual angel and VC investors etc.). 
It  was  also  suggested  that  the  EU  could  also  play  a role  in  improving  framework  conditions,  through  a 
rigorous assessment of the impact that EU financial legislation to regulate investment in alternative asset 
classes and relating to capital adequacy ratios.  

In  summary,  those  against  further  EU  intervention  in  this  area  questioned  whether  attracting  private 
institutional investment was necessary, since it was argued that the funding gap in European VC is already 
being plugged through a  combination of different  funding sources,  ranging from the EIF and the EBRD, 
through  to  national  and  regional  public  interventions  and  angel  activity.  It  was  noted  that  given 
differential  tax  breaks  for  individual,  as  opposed  to  institutional  investors,  it  is  unsurprising  that 
institutional investors only account for a small percentage of VC investment. 

Overall, although opinions were clearly divided on the nature and extent of market failures in some areas, 
most  stakeholders  agreed  that  some  action  on  EU  level  would  be  beneficial  for  economic  growth. 
However, a significant minority (circa 15 interviewees) expressed the view that the EIF is already doing a 
good job in addressing market failures  did not  think  that action was  needed.  However, the majority of 
stakeholders argued that some action is needed. 

76 

 
 
 
 
 
 
Options analysis & key issues 

4.3.3  Option 2 – Increase EU funding for existing equity-based financial instruments and FOFs 

for innovative SMEs 

A number of sub-options were reviewed, including:  

  Sub-option  2.1  -  Increase  funding  for  the  Single  EU  Equity  Financial  Instrument  (e.g.  Horizon  2020 

(InnovFin SME VC) and COSME (Equity Facility for Growth)." 

  Sub-option  2.2  –  increase funding  to  strengthen capital  available  to  the  EIF to expand  the  size  and 

scope of its FoF portfolio.  

  Sub-option  2.3  -  increase  funding  for  other  pilot  equity  instruments  for  innovative  SMEs  (e.g.  pilot 

facility for technology transfer, Fast Track to Innovation Pilot). 

The different sub-options are now considered. 

Option 2.1 - Increase funding for the Single EU Equity Financial Instrument. 

The main points in favour of this sub-option were: 

  The  EIF  already  manages  many  existing  EU  financial  instruments.  As  an  institution,  the  EIF  is 

 

experienced, well regarded in the market and has a successful track record. 
It  therefore  has  the  internal  delivery  and  monitoring  capacity  to  increase  the  size  of  the  Single  EU 
Equity Financial Instrument. 

The counter-arguments can be summarised as follows: 

  The funding allocation was already thought through at the programming stage.  
  Absorption  capacity  among  potential  beneficiaries  is  not  yet  proven,  since  it  is  too  early  in  the 

implementation of the new instruments for sufficient monitoring data to be available.  

EU  funding  could  be  increased  for  existing  EIF  FoFs  and  /  or  other  EU  financed  equity  instruments 
targeted at SMEs, such as the Single EU Financial Equity Instrument funded through both H2020 (access 
to  risk  finance)  and  COSME.  According  to  a  German  public  bank  representative,  there  is  a  sufficient 
demand in the market for more  EU money to be allocated, provided that this is well-managed. The EIF 
was widely recognised by interviewees as being a credible market player both as a cornerstone investor 
and FoF manager.  

An advantage of this sub-option is that the EIF has the capacity, skills and knowledge to increase the size 
and scope of its operations on a pan-European basis since it already has the monitoring capabilities and 
local teams  in  place  to  implement  a  pan-European  FoF.  It  is  recognised  as  having  extensive  experience 
both  in  making  direct  investments  in  GPs  and  in  managing  FoFs.  The  EIF  has  also  managed  significant 
scale co-investment funds, for example, funded by the ERDF (e.g. Scottish co-investment funds, JEREMIE 
holding funds in Lithuania, Bulgaria, etc.).  

One argument put forward by some stakeholders for increasing funding to the EIF was that supporting an 
existing  actor  with  relevant  skills,  knowledge  and  experience  of  the  European  VC  market  may  make  it 
easier  to  hold  them  accountable  compared  to  creating  a  new  financial  intermediary  with  several 
managers  involved  (e.g.  mentioned  by  a  Polish  public  FoF  manager  and  a  number  of  VC managers).    A 
practical  solution  came  from  a  representative  from  a  German  public  bank  who  suggested  that  the  EU 
could provide the EIF with investment guarantees and that the EIF could then allow underlying funds to 
benefit from such guarantees in order to attract private investors. A Dutch public authority, conversely, 
believes  that  it  would  be  better  for  the  EU  to  co-invest  together  with  the  EIF  rather  than  to  provide 
guarantees.  

77 

 
 
 
 
 
 
 
Options analysis & key issues 

With  regard  to  the  relationship  between  a  pan-European  fund  of  funds  and  the  EIF,  there  is  general 
agreement  among  interviewees  that  the  EIF  already  fulfils  some  of  the  same  functions  that  a  pan-
European  FoF  would  do.  Some  stakeholders  argued  that  investing  additional  EU  funding  to  support 
European VC through an expansion of the EIF’s existing FoF programme would be a more cost-effective 
solution  than  establishing  a  new  pan-European  FoF  from  scratch.  However,  as  noted  earlier,  there  are 
already concerns that the EIF accounts for too high a share of the European VC market and should not 
increase its market share, due to the risk of “crowding out” effects and over-reliance on a single actor.  

It  is  moreover  doubtful  whether  investing  additional  public  money  into  existing  schemes  will  attract 
further private sector investment, which would be one of the key goals of a pan-European FoF initiative 
as described in Option 4.1.   

Option 2.2 – increase funding to strengthen capital available to the EIF to expand the size and scope of 
its FoF portfolio.  

Key points in favour of this sub-option were: 

  The EIF is already performing its role in increasing the supply of VC both in more mature markets (e.g. 
successful EIF-backed FoF in the UK and the Netherlands) and in less well developed markets (e.g. the 
Baltic States, Poland). 

 

It  could  therefore  relatively  easily  scale  up  the  size  and  scope  of  its  existing  FoF  programme 
compared with other actors. 

The counter-arguments can be summarised as follows: 

 

Increasing  funding  through  an  expansion  in  the  size  of  the  EIF’s  programmatic  mandate  from  the 
Commission could reinforce  the EIF’s dominance  and may not  attract additional private investment 
(especially larger international investors seeking large ticket size and higher commercial returns). 

  Plurality in the market would be better served by having multiple cornerstone investors, rather than 

being over-dependent in the EIF. 

Detractors of Option 2.2 mentioned that whilst the EIF is playing an invaluable role in  plugging funding 
gaps in the European VC industry, over the longer term, there needs to be more sustainable supply of VC 
and a better balance between public and private sector market participation.  

Whilst  VC  and  FoF  managers  interviewed  recognised  that  increasing  EU  funding  for  the  EIF’s  FoF 
programme has certain advantages (e.g. not reinventing the wheel, technical and monitoring capacity to 
serve  both  as  a  cornerstone  investor  and  FoF  manager),  there  would  equally be  disadvantages.    These 
arguments were set out earlier in detail and include: the difficulty for the EIF given that it also pursues EU 
policy aims in achieving a sufficiently high commercial return to attract private sector investors, the risk of 
crowding  out  of  private  FoF  managers  (by  making  an  already  dominant  player  in  the  market  even 
stronger, etc.).   

Several  stakeholders  cautioned,  however,  that  the  FoF  backed  by  the  EIF  in  less  developed  markets 
sometimes  have  inexperienced  managers  and  are  too  constrained  in  their  investments  by  additional 
rules.  A  British  investor  raised  the  point  that  it may be  hard  to  justify  politically  diverting  money  away 
from  other  funding  channels  under  Horizon  2020  into venture  capital  investments  (as envisaged  under 
sub-option 2.1).  

Overall, whilst stakeholders recognised the vital role of the EIF within the VC eco-system as a source of 
finance and also professionalism and expertise, it was generally accepted that increasing the size of the 
EIF’s  existing  FoF  and  direct  co-investment  activities  would  not  address  some  of  the  structural  barriers 
facing  the  European  VC  market  (e.g.  lack  of  private  participation,  difficulty  in  attracting  large-scale 
international capital and small average size of VC funds).  

78 

 
 
 
 
 
 
Options analysis & key issues 

Option 2.3 - increase funding for other pilot equity instruments for innovative SMEs (e.g. pilot facility 
for technology transfer, Fast Track to Innovation Pilot). 

A third alternative approach could be to provide additional funding to existing pilots being tested out by 
DG RTD, namely: , 

  The Pilot facility for technology transfer – which is under development; and 
  The Fast Track to Innovation (FTI) pilot120 which provides funding for bottom-up proposals for close-

to-market innovation activities in any area of technology or application.   

Further  information  about  these  initiatives  is  provided  in  Section  2.4  (Existing  provision  of  equity 
financing instruments to support  innovative start-ups and SMEs in Europe). Option 3  -  set-up a fund of 
funds  programme  to  increase  financing  supply  to  existing  national  Fund  of  Funds  and  /  or  encourage 
regional VC funds to cooperate through a FoF structure. 

Through these  stakeholder interviews, very little feedback  was received on the scope  for increasing EU 
funding for these  pilots. This reflects the  fact that as pilots, these  important initiatives are not yet that 
well known among the VC stakeholder community. 

However,  it  can  be  observed  that  the  FTI  already  has  a  budget  of  €200 million  over  2  years  whilst  the 
Technology  Transfer  Finance  Facility  (TTFF)  has  a  budget  of  €60  million.  Since  these  are  pilots,  and  by 
definition,  their effectiveness  and  success  cannot  yet  be  judged,  it  would  be  imprudent  to  increase  EU 
funding  to  them  until  a  thorough  evaluation  has  been  carried  out.  A  further  observation  is  that  whilst 
supporting  technology  transfer  and  close-to-market  innovation  activities  is  imperative,  it  is  part  of  the 
supporting  framework  conditions  in  which  a  successful  European  VC  sector  can  operate,  rather  than 
being an alternative approach to channelling EU funding directly into VC. 

4.3.4  Option 3 – supporting existing FoFs through an EU scheme to encourage them to invest 

cross-border. 

Turning  to Option 3, two  sub-options were  identified  under Option 3  and the  stakeholder feedback  on 
these is now examined:  

Option 3.1  -  EU  to  set  up a  pan-European  funding  scheme  to  encourage  established  national (public) 
fund of  funds operators  to  cooperate with  FoF in  other  countries  through  cross-border,  multi-country 
FoF. 

The key points in favour of Option 3.1 were: 

  A  pan-European  FoF  scheme  benefiting  national  FoF  operators  would  encourage  the  setting  up  of 

cross-border, multi-country FoF, which are important for achieving critical mass. 

  Strengthening publicly-backed national FoF operators could help to stimulate competition and ensure 

that underlying VC funds were less dependent on securing EIF funding. 

  A new scheme would allow EU to draft the rules of governance according to their objectives 

120 http://ec.europa.eu/programmes/horizon2020/en/h2020-section/fast-track-innovation-pilot-2015-2016  

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Options analysis & key issues 

Conversely, some stakeholders maintain that: 

  Supporting existing instruments might increase public sector dominance, especially if the EIF were to 

be involved as an entrusted entity or in running individual FoF. 

  Publicly-backed  FoF  are  not  currently  attractive  to private  investors,  either  because  they  pursue  at 
least  some public  policy objectives  and are not sufficiently focused on return on capital or because 
they operate in European countries (or regions) with little VC activity.  

  Private  sector  investors  made  it  clear  that  they were  unlikely  to  invest  if  there  were  geographic or 

political constraints on where they could invest. 

  Absence of a clear market failure - there is already extensive provision of seed and early-stage VC at 
regional level through the European Structural and Investment Funds (including the Jeremie Holding 
Fund instrument in the new member states and through national funding schemes, such as the Fonds 
nationals  d’amorçage  in  France.  Often  regions  have  excessive  investment  funds  and  the  quality  of 
enterprises supported suffers. 

Under  Option  3.1,  the  EU  would  put  in  place  a  structure  for  a  new  funding  mechanism  that  existing 
publicly-backed national FoF could tap into to increase the size of newly established FoF in future. This 
option was supported by members of the EVFIN network (see Section 2.4.4 for a full list of national FoF 
operators  belonging  to  EVFIN),  who  made  a  proposal  to  the  EC  to  pool  the  capital  and  expertise of  its 
member institutions into such a FoF structure. These are mostly national public financing agencies. 

Such a FoF would aim to build up a portfolio of 15 to 20 VC funds, and would invest on a pari passu basis 
with other commercial investors. The aim would be to focus primarily on cross-border VC funds managed 
by  established  and  newly  created  management  companies,  targeting  early-stage  funds.    Among  the 
potential  benefits  of  such  an  approach  according  to  members  of  EVFIN  interviewed  are:  increasing 
average  fund  size  by  pooling  new  EU  money  from  the  Commission  together  with  national  FoF  capital 
pooled across several countries and in addition, attracting additional funds from international investors, 
who would not otherwise invest unless there were sufficient critical mass. 

A Dedicated Investment  Vehicle  (DIV)  has already  been established by a French management  company 
(called Athena) to this end. According to EVFIN, the purpose of setting up a DIV is to provide a legal entity 
through  which  a  funding  mechanism  could  in  future  be  set  up  to  support  national  FoF  in  establishing 
cross-border FoF.  

A  small  number  of  stakeholders  supported  this  Option  on  the  basis  that  it  would  encourage  national 
operators to cooperate with one another through the setting up of multi-country VC funds, rather than 
through a pan-European FoF approach.  This would enable them to set up larger FoF by pooling capital. 
Greater critical mass could help them to attract private sector participation.  If each national FoF operator 
established a cross-border fund by pooling their capital (matched by a commitment from the EU to a new 
FoF to boost the supply of capital to national FoF, wishing to engage in cross-border FoF provision), there 
is a risk that the individual national constituent FoF continue to operate mainly on a domestic basis. 

A number of stakeholders recognised that there could be benefits in increasing the role of national FoF 
operators, such as providing competition for the EIF, potentially attracting new international capital into 
national VC markets from investors. An interviewee from Lithuania’s national financing agency involved in 
the €100m Baltic Innovation Fund said that it would have been difficult to attract investors if a VC fund of 
funds  had  been  established  focused  solely  on  supporting  SMEs  in  the  Lithuanian  domestic  market.  A 
similar  view  was  echoed  through  the  interviews  in  Sweden,  where  two  interviewees  stressed  that  “an 
international FoF could help to foster the transnational dimension and to bring in international capital.   

This  would  benefit  recently  established  and  high-growth  companies  wanting  to  internationalise  and 
extend their professional networks across Europe. In addition, regional funds have a closer proximity to 

80 

 
 
 
 
 
 
Options analysis & key issues 

market  and  could  be  more  effective  in  encouraging  cross-border  investments  and  separate  lines  of 
investment for underserved markets such as in Eastern Europe (British investor). 

There were different views as to which organisation would best be placed to implement a pan-European 
VC scheme involving the public sector, in particular whether this should be managed on a decentralised 
basis  by  national  FoF  operators,  as mooted  under  the  EVFIN  scheme,  or  alternatively  whether  such  an 
initiative should be managed under the umbrella of EIF, which is one of the only players, perhaps along 
with  the  EBRD  that  has  the  pan-European  reach,  knowledge  of  the  different  state  of  development  of 
different  VC  markets  and  monitoring  capacities  to  implement  such  a  scheme.    Again,  the  two  are  not 
mutually exclusive in that the EIF could potentially administer the distribution of funding to national FoF 
operators for instance through a call for expression of interests. 

There were concerns among some stakeholders – as noted in the feedback on Option 2, that if the FoF 
initiative  to  be  implemented  by  the  EIF,  this  could  lead  to  the  risk  of  crowding  out  effects  and  market 
distortion and would raise issues as to whether this duplicates what the EIF is already doing, given that 
through  investments  in  FoF  and  co-investment,  it  already  accounts  for  a  significant  share  of  the  VC 
market  and  the  total  number  of  funds.  If  however  the  EIF  were  only  administering  the  distribution  of 
funding to national FoF operators in order for them to overcome structural deficiencies relating to fund 
size, then this would be more acceptable to stakeholders from a competition point of view. However, it 
was also recognised since the EIF is an effective fund of funds manager, it would be well-placed to take 
part in a Call to bid to operate one of the individual FoF. 

A number of respondents highlighted the point that if a new pan-European FoF were to be established to 
promote the establishment of cross-border FoF comprised of existing national FoF operators, this would 
need to be managed  effectively by an existing player in order to ensure  good governance. The EIF was 
viewed  as  being  well-placed  to  fulfil  such  a  monitoring  function,  given  its  knowledge,  experience  and 
ability to monitor investments on a pan-European basis. 

Less  positively,  among  the  interview  feedback  was  that  even  if  cross-border  FoF  were  established  by 
national  FoF  operators  /  national  promotional  banks,  there  was  a  question  mark  as  to  how  genuinely 
cross-border  such  a  scheme  would  be  at  the  implementation  level,  given  that  national  FoF  operators 
currently  mainly  have  experience  in  investing  in  a  domestic  context.    Investing  in  other  EU  countries 
through a cross-border scheme would require in-depth knowledge of the VC markets in other countries, 
monitoring capabilities (including linguistic) in those countries etc.  It was suggested that the EIF and the 
EBRD are the only public sector operators that can operate on a genuinely cross-border basis across the 
EU.  

An obvious drawback of the approach proposed by EVFIN however is the risk that in strengthening the 
cross-border capabilities of national FoF, this could lead to the continued domination of the public sector, 
especially at the seed and early-stages. It could however help to attract private capital back to the sector 
through  greater  critical  mass  by  attracting  investors  to  the  FoF  level.  Some  interviewees  questioned 
whether  if  new  FoF  were  established  by  the  public  sector  using  a  new  pot  of  funding  whether  the 
objectives of public and private sector stakeholders could be aligned. A counterargument here advanced 
by a major national FoF operator in France was that the best FoF operators already operate along private 
sector lines and only invest on a commercial basis.  

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Options analysis & key issues 

Sub-option 3.2 – EU to invest in setting up regional, cross-border VC FoF building on existing regional VC 
funds. 

Among the findings in favour of this approach were those:  

  Supporting  regional  FoF  could  encourage  cross-border  VC 

investment  and  help  to  address 

underserved markets. 

  Many regional FoF are too  small in scale to attract private investment. A multi-country regional FoF 

structure could help to overcome this. 

However, there are also disadvantages, such as: 

  The risk of duplicating emerging initiatives, such as the Vanguard Initiative. 
  Regional  FoF  are  often  heavily  constrained  by  geographic  and  sectoral  restrictions  in  what  they can 
invest  in  which  would  be  unlikely  to  attract  private  investors,  even  if  there  were  a  cross-border 
elements to the FoF. 

Many  regional  VC  funds  have  been  established,  some  of  which  are  EU  funded  through  the  European 
Structural and Investment Funds (ESIF). However, they do not currently operate cross-border. There are 
however initiatives such as the Vanguard Initiative that are considering closer cooperation and possible 
joint cross-border FoF structures to operate regionally-focused, multi-country FoF. 

The  second  sub-option  under  Option  3  would  be  to  establish  a  multi-country  FoF  initiative  that 
encourages cooperation between existing regional VCs through a FoF structure. The  objective would be 
to  promote  economic  development,  growth  and  jobs  in  less  developed  regions  and  the  accelerated 
development  of  high-growth  SMEs.  According  to  some  stakeholders,  such  an  initiative  would  allow  for 
the  development  of  a  targeted,  regionally  coherent  portfolio  which  could  have  advantages  compared 
with  a  pan-European  FoF  approach  covering  all  28  Member  States.  However,  this  option  was  not 
generally mentioned by stakeholders as the frontrunner option, mainly because of concerns that existing 
regional  FoF  have  suffered  from  very  poor  performance  and  are  too  politically  constrained  with 
corresponding limitations as to where and in what they can invest (e.g. geographic / sectoral constraints).  

There  was  a  strong  perception  that  regional  FoF  are  neither  as  commercially viable  as  alternatives  nor 
attractive to investors (especially international pools of capital) because they face onerous constraints on 
their investment decisions in terms of sectors and geographies and this would lead to overly restrictive 
investment  criteria  being  imposed.  Thus,  it  would  be  crucial  to  prove  that management  of  such  a  new 
fund  is  truly  independent  even  if  the  EU  acts  as  an  anchor  investor  (mentioned  by  a  German 
representative  from  a  public  bank).  Moreover,  setting  up  such  a  new  fund  would  be  more  time-
consuming than investing in existing schemes as suggested under option 2. Finally, if the EIF were to be 
involved  in  such  a  scheme,  it  would  again  risk  duplication  with  existing  EIF-backed  FoF  (e.g.  the  Baltic 
Innovation Fund already operates on a multi-country, regional basis).  

Through  the  interviews,  an  example of  a  specific  initiative  to  set  up  a  regionally-based  FoF  mechanism 
was  identified, the  Vanguard  Initiative  for  New Growth  through  Smart  Specialisation121.  The  aim  is  to 
better  position  and  embed  the  smart  specialisation  agenda  within  regional  development  frameworks 
through cooperation between a series of European regions. A tentative proposal has been discussed for a 
possible future regional FoF initiative through cooperation between regional authorities participating in 
Vanguard.  Stakeholders  that  were  interested  in  the  regional  dimension  acknowledged  that  such  an 
initiative would  need  to  tap  into  different  funding  sources  other  than  H2020,  for  example  through  the 
ERDF.   

121 http://www.s3vanguardinitiative.eu/ 

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Options analysis & key issues 

There  is some evidence of rationalisation within regional fund of funds. For instance, an interviewee in 
France  pointed  to  the  forthcoming  merger  of  a  number  of  different  French  regional  VC  funds  to 
strengthen critical mass and overcome over-fragmentation.  

In conclusion, whilst serious consideration needs to be given to the first sub-option within Option 3, the 
second sub-option does not appear to have sufficient stakeholder support to be considered further within 
the scope  of this study for DG RTD.     However,  the concept of setting up a regional, multi-country FoF 
mechanism  to  ensure  critical  mass  of  regional  FoF  which  typically  suffer  from  a  reputation  for  poor 
performance could perhaps be considered further by DG REGIO. 

4.3.5  Option  4  –  Set  up  a  pan-European  public-private  seed  and  venture  capital  Fund  of 

Funds. 

Option 4 is the most ambitious of the different options, and a number of distinct sub-options have been 
considered through the analysis, namely:  

  Sub-option 4.1  -  set up a FoF programme  to support  4-5 individual FoF in the first  generation.  This 
would consist of multiple public-private FoF to be operated by private or public sector managers  

  Sub-option 4.2 - set up a single pan-European public-private FoF  
  Sub-option  4.3  -  set  up  a  pilot  FoF  to  test  the  feasibility  of  going  ahead  with  a  public-private  pan-

European FoF programme.  

  Sub-option 4.4 – set up an EU funding scheme through a FoF mechanism to support VC funds that are 

still at the investor-search stage (gap funding approach). 

Under all of these sub-options, the fund of fund managers (or in the case of Option 4.4, the underlying 
fund managers) would be selected following a Call for Expressions of interest. 

The feedback on these sub-options is provided below. 

Option 4.1 - set up a programme, consisting of multiple public-private FoF to be operated by private or 
public sector managers selected following a Call for Expressions of interest.  

The key points made in favour of Option 4.1 can be summarised as: 

 

 

Supported  by  a  majority  of  stakeholders,  given  the  need  to  diversify  investor  landscape  and  pool 
resources. 
It would be easier to attract private investment if there were private management of a FoF which is 
not the case with existing EU-backed instruments 

  Would have to be clearly differentiated from existing EU-backed instruments to add value. 
 

Key  would  be  to  maintain  right  balance  between  resources  allocated  and  the  pool  of  underlying 
SMEs  in  order  to  maximise  return  and  be  able  to  compete  with  private  FoF  operating  in  the 
European VC market.  
Individual FoF could focus on different sectors, geographies, stages of investment (e.g. early vs. later 
stage VC), combination of start-ups and mature firms. 

 

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Options analysis & key issues 

The key points made against this option are: 

 

 

Risk of duplication with existing EIF-backed schemes, especially since the level of funding is already 
significant 
Additional layer of fees would have to be compensated for, e.g. through asymmetric returns 

Option 4.1 was supported by Invest Europe   and a number of private sector FoF operators and underlying 
fund  managers.  Invest  Europe      has  set  out  its  views122  on  the  general  design  principles  for  a  VC  FoF 
programme  supported  by  the  EC.  These  include  using  incentives  to  attract  private-sector  investors 
(asymmetric  returns),  investing  across  all  industry  sectors  (rather  than  imposing  any  restrictions),  and 
investing in VC funds with a high target allocation of EU firms (but with flexibility for the underlying funds 
to invest a certain proportion of funding outside the EU, as is already the case with EIF FoF.  

Compared  with  the  other  options,  Option  4.1  was  recognised  as  having  the  advantage  that  it  would 
deliver something clearly differentiated from existing public provision in that the private sector would be 
tasked with managing the FoF under the programme and securing match funding at a ratio of at least 1:1. 
A  clear  advantage  of  this  option  is  that  it  is  in  line  with  the  principles  outlined  in  the  proposal  for  a 
Regulation  on  the  European  Fund  for  Strategic  Investments  (EFSI)  since  double  leverage  would  be 
achieved  at  both  the  FoF  level  (by  bringing  in  private  capital)  and  through  the  underlying  funds  level, 
where private capital will typically account for 60-70% of the individual VC funds that a FoF invests into.  

Under the EIF’s existing FoF programme, the main investors at  the fund of funds level are other public 
sector institutions. Leverage is primarily achieved through selecting VC fund managers that are required 
to raise further funding from private sources (usually a minimum of match funding is required) or through 
direct co-investments. There are however already 4 EIF FoF especially in Southern Europe (for instance in 
Spain and Portugal), where a number of pension funds have invested alongside the EIF at the FoF level.   

The EIF stressed that caution is needed in interpreting leverage ratios. Among the challenges are those:  

 

It may be difficult to ascertain whether match funding is genuinely new, “additional” money sourced 
from new pools of capital, or simply displaced capital that would already have been destined for the 
European VC asset class (risk of crowding out private capital).   

  The leverage effect of money invested in seed and early-stage venture capital will typically be lower 
in  geographies  within  the  EU  where  public  intervention  is  needed  in  order  to  help  to  develop  the 
market infrastructure. Conversely, investment in mature VC markets will require a lower public rate 
of intervention than in markets where the state of maturation is lower.  

Private LPs and GPs interviewed, as well as Invest Europe  , stressed that there should be scope under a 
FoF programme to access new sources of capital, because if there were to be say 4-5 FoF established and 
private  FoF  managers  appointed,  each  GP  would  then  have  access  to  different  investors  and  different 
international  pools  of  capital,  and  the  larger  ticket  size  would  allow  institutional  investors  to  become 
involved.  

122  http://www.evca.eu/policy/key-topics/promoting-the-industry/pan-eu-funds-of-funds/  and  November  2014  position 
statement. 

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Options analysis & key issues 

It  was  also  widely  accepted  that  Option  4  was  the  option  most  likely  to  help  tackle  the  structural 
problems  analysed  in-depth  in  Section  2.1.2  on  supply-side  issues  i.e.  that  in  order  to  be  competitive, 
Europe  needs  to  significantly  increase  the  average  size  of  VC  funds  and  consequently  also  of  FoF  to 
attract international investors not currently represented in the European VC marketspace.  

The  research  from  Scandinavia,  the  UK,  Poland,  the  Netherlands  and  Germany  highlighted  that  most 
interviewees saw Option 4 as a viable option. Most respondents agreed that there is a need to increase 
total  supply  of  VC  in  Europe  and  that  an  EU  initiative  to  increase  VC,  especially  private  sector 
participation, would be welcome.  

However, not everyone agreed. An alternative viewpoint expressed by at least 10 stakeholders was that 
the EU should instead simply increase its funding for the EIF so that the EIF can increase the scale of its 
activities, since the EIF is “already fulfilling this function in the European VC market”. Some stakeholders 
(e.g.  German  public  bank  and  European  public  investor)  stated  that  it  would  be  hard  to  ascertain  the 
added value of a pan-EU FoF given existing EIF and other instruments. Again, it was stressed that private 
management of the FoF programme would be crucial in demonstrating its added value and differentiating 
it from existing schemes.  

Although  many  stakeholders  expressed  broad  support  for  Option  4.1,  opinions  were  divided  on  the 
question of whether the returns should be on a pari passu versus an asymmetric returns basis. This issue 
is  explored  in  depth  in  Section  5.2.10  (risk  sharing  –  set  up  stage)  and  Section  5.4.2  (pari  passu versus 
asymmetric model). A criticism made of Option 4.1 was that one or more private FoF would invest in the 
best underlying funds but would not take an active role in maturing the EU VC market (which especially 
some of the public actors still thinks is key  – it took 40 years to mature the US market so the EU most 
likely still has some way to go). Thus, they would invest in the ones that are most likely to be able to raise 
capital  themselves  anyways  rather  than  supporting  newly  emerging  managers.  On  the  other  hand,  in 
absence of asymmetric returns, it may very hard to justify an additional layer of management fees that 
comes with a FoF.  

In  addition,  a  public  investor  raised  the  point  that  when  investing  in  a  FoF  as  opposed  to  direct 
investments in VC funds it is harder for the investor to be visible with benefitting SMEs. In addition, the 
performance  of  the  FoF  would  have  to  match  that  of  existing  private  FoF  in  order  to  attract  private 
investment which may not be easy to achieve, especially if the FoF would invest in the EU28, including 
underperforming  regions  (according  to  a  Dutch  investor,  German  public  bank  representative).  Another 
practical point was raised by a British investor regarding whether the EU under this initiative would in fact 
become  a  de  facto  LP  by  co-investing  alongside  other  institutional  investors  at  the  FoF  level.  This  is 
however similar to the position that the EIF is in on its own FoF programme, where it also plays the FoF 
manager role, not only serves as a cornerstone investor. 

Although  some  stakeholders  (e.g.  national  FoF  operators,  public  authorities  and  the  EIF)  appeared  to 
favour a pari passu approach on the basis that a FoF ought to be able to attract private investment if it 
invests on a purely commercial basis. However, although this has often the model in the past, it can be 
noted  that  most  FoF  only  involve  public  money.  It  may  be  easier  to  attract  private  capital  at  the 
underlying funds level on a pari passu basis, given that investors can potentially benefit from high returns.  

Experiences from Canada’s VCAP suggest that it can be difficult to attract the private sector even when 
offering asymmetric returns. Most interviewees from private equity and VC fund managers argued that if 
the EU is serious about encouraging the private sector back to European VC, it should allow the private 
sector to capture the upside in return for investing in higher-risk investment stages. Asymmetric returns 
were regarded as potentially helping to overcome barriers to attracting private investors at the FoF level, 
namely double layers of fees. 

85 

 
 
 
 
 
 
 
 
Options analysis & key issues 

Option 4.2 - set up a single pan-European public-private, EU-wide FoF covering the whole EU managed 
by public or private sector FoF managers following a call for expressions of interest.  

  Many  stakeholders  were  either  generally  in  favour  or  against  the  EU  setting  up  a  FoF  programme, 
without  expressing  a  strong  preference  as  to  whether  this  should  consist  of  multiple,  somehow 
differentiated, FoF or a single pan-EU FoF 

  While  some  stakeholders  saw  the  pan-EU  coverage  of  a  single  FoF  as  an  advantage  since  it  would 
provide the GP with flexibility, others cautioned that this would not be manageable due to a lack of 
proximity  to  markets  and  the  difficulty  in  identifying  the  top-performing  VC  funds  in  all  Member 
States 

The points made in favour and against setting up a single pan-European FoF were broadly similar to the 
points made under Option 4.1. A key distinction is that some stakeholders cautioned that under a single 
pan-European FoF a management team would struggle to do justice to all geographies and sectors given 
that  proximity  to market and  existence  of  networks  are  key  to  the  success  of any  FoF.  In  addition,  the 
massive scale required for a pan-European FoF to be effective would once again risk emulating what the 
EIF is already doing. 

On the other hand, some stakeholders maintained that a pan-European focus would provide the flexibility 
to the GP to pick  the most  profitable  investments across Europe  rather than being constrained in their 
choices.  The  pros  and  cons  of  a  single  pan-EU  FoF  vs  a  programme  of  multiple  FoF  also  very  much 
depends on how these multiple FoF would be differentiated, as discussed above. 

A point was made by a European public bank interviewed who stated that there might be a first mover 
advantage  for  a  publicly  backed  FoF  in  the  European  VC  market  and  this  could  lend  the  asset  class 
credibility which would then encourage private investors to follow suit – the initiative would thus have a 
signalling function. Conversely, some stakeholders believed that a single pan-European FoF would find it 
harder  than  multiple  FoF  to  raise  funds  and  to  achieve  a  diverse  investor  composition.  Moreover,  by 
covering  all  28  Member  States,  a  single  FoF  might  raise  concerns  amongst  potential  investors  about 
whether it would be able to pick the best VC funds in Europe. 

Option 4.3 - set up a pilot FoF to test the feasibility of going ahead with a public-private pan-European 
FoF programme.  

This was not viewed as a realistic option by several stakeholders interviewed. The main argument made 
was that it would take too long – at least 7-10 years – to be able to assess the performance of a pilot. 
Which is too long for a tentative scheme. If, however, this sub-option would be limited to a 1-2 year test 
phase  to  allow  the  European  Commission  and  the  GP  teams  appointed  to  run  individual  FoF  to  gain 
experience and develop a better understanding of the potential level of interest amongst different types 
of  investors,  this  could  be  a  useful  means  of  proceeding.  In  effect,  a  fully-fledged  first  generation 
programme could still be launched, but this would be staggered to help minimise implementation risks 
(and also to avoid creating over-supply in the market).  The Canadian VCAP FoF programme experience 
suggests that launching individual FoF at different times (three were launched together). 

Option  4.4  –  set  up  an  EU  funding  scheme  to  support  privately-backed  VC  funds  that  are  still  at  the 
investor-search  stage  in  order  to  encourage  the  private  sector  back  into  the  European  VC  market  (a 
“gap funding” approach). 

This sub-option would not necessitate the setting up of a FoF actively investing in VC funds with a pre-set 
strategy but rather represent a pot of funding available to new VC funds searching for investors. It would 
kick-start  these  fund managers’ activities. Effectively, this would make the European Commission an LP 
co-investing  in  new  VC  funds.  Potentially,  this  funding  scheme  could  also  be  made  available  to  new 
private FoF managers.   

86 

 
 
 
 
 
 
Options analysis & key issues 

  Making  money  available  to  aspiring  VC  managers  may  be  particularly  opportune  in  less  developed 

European markets 

  This option could be combined with sub-option 4.1 whereas one or several of the FoF to be set up 

would actively support new VC funds 

A  small  number  of  stakeholders  interviewed  were  in  the  process  of  first-time  fund-raising  themselves. 
Some feedback was obtained from aspiring and from existing VC managers with regard to whether the EU 
should  provide  support  to  encourage  new market  entrants  and  first-time  FoF managers.    Here,  a  clear 
distinction  can  be  made  between  first-time  VC  managers  lacking  track  record  and  first  time  FoF 
managers, where they may well already have a well-established track record in managing underlying VC 
funds.  Both are important aspects of the overall VC eco-system. 

In relation to the encouraging first-time VC managers, this was identified as an especially important issue 
in  less  developed  VC  markets.  The  interviews  identified  examples  of  organisations  such  as  the  EBRD, 
which  actively  support  new  managers  in  order  to  help  develop  the  VC  infrastructure  in  under-served 
markets. The EIF has also supported new VC fund managers in less developed markets, for instance in the 
Baltic States. However, a number of VC managers pointed out that whilst the EIF has many strengths, it 
was viewed as being less adept at spotting new and emerging managers sufficiently early compared with 
national FoF and private operators.  

It could be argued that possibly one or more of the FoF within an overall FoF programme should actively 
promote  the  entrance  to  the  market  of  new  VC  managers  by  supporting  new  VC  FoF.  However,  a 
disadvantage  pointed  out  by  other  interviewees  of  supporting  new  VC  managers  is  the  higher  level  of 
associated  risk  for  the  FoF  in  backing  new  or  emerging  managers.  In  relation  to  the  concept  of 
encouraging existing VC managers into the fund of funds marketspace, there are clearly less challenges 
since the VC managers in question are already likely to have extensive fund management expertise at the 
underlying VC fund level.  

4.4  Assessment of risks and the feasibility of the different options 

4.4.1 

Introduction – identification of risks and mitigation measures 

The European Commission already has extensive experience of risk assessment in relation to setting up 
financial  instruments  schemes,  for  instance  DG  Grow  and  DG  RTD  have  gained  experience  during  the 
process of setting up the Single EU Equity Financial Instrument funded through Horizon 2020.  However, 
the  European  Commission  does  not  presently  have  any  in-house  expertise  in  setting  up  and  operating 
European venture capital fund of funds.  It is therefore important to identify and assess the principle risks 
associated with going ahead with a pan-European VC FoF and to identify possible mitigation measures.  A 
distinction can be made between different types of risks, such as the: 

87 

 
 
 
 
 
 
Options analysis & key issues 

  Financial  –  general  risks  associated  with  investing  in  the  European  VC  asset  class,  lower  than 

expected performance returns, difficulties in securing successful exits. 

  Political / feasibility– the risks associated with the political feasibility of each option/ sub-option; 

  Technical  execution    -  risks  linked  to  the  implementation  of  the  different  options/  sub-options, 
whether the extent of progress towards the policy objectives identified in setting up a pan-European 
FoF meets stakeholder expectations; 

  Timing – the performance of VC funds and FoF is strongly linked to the stage in the economic cycle 

when the funds are set up and the length of investment period.   

  Governance  and  effective  monitoring  -  risks  linked  to  the  need  for  ongoing  managerial  input  and 

monitoring activities throughout the lifetime of a fund of funds.  

  Reputational - a cross-cutting consideration in respect of all the above types of risks. 

4.4.2  Overall assessment of risks 

The  poor  performance  of  the  European  VC  sector  is  examined  in  Section  2,  and  Annex  E  performance 
returns in detail.  The IRR data analysed in Annex E shows how the lack of return in seed and early-stage 
investment results in a lack of supply of investment into this stage. However, the data also shows that top 
quartile  seed  and  early-stage  funds  can  provide  acceptable  performance.  Moreover,  the  VC  asset  class 
actually performed similar to the buy-out class up until the dotcom bubble, demonstrating the potential 
of the asset class. 

The analysis, supported by data, shows that although there have been improvements in the performance 
of the European VC asset class, the Commission (and investors in a FoF programme) should be aware of 
the risks associated with the asset class that: 

  The  historical  performance  of  European  VC  is  poor,  although  it  has  significantly  improved  in  the 
previous  2-3  years.  Future  performance  will  oscillate  depending  on  the  economic  cycle  and  the 
spread of investments made during the investment period by vintage year(s). 

  Many  private  investors  consequently  remain  unconvinced  whether  the  double  layer  of  charges 

inherent in a FoF model can be justified.  

  Many publicly funded FoF are reluctant to reveal their actual IRR. The limited target IRR data that was 
available suggests an IRR of between -0.5% and 5%. On a parri passu basis, this is significantly below 
the  commercial  level  at  which  a  FoF  would  be  likely  to  attract  private  investors  without  an 
asymmetric incentives structure. 

  VC investments are alternative investments that are still generally at the cash-burning stage and may 
be  several years away from profitability. Therefore, the timing of any returns generated during the 
operation of the FoF cannot be predicted in advance. 

  The level of return may fall short of expectations or be negative.  It will also take considerable time to 
determine the level of performance return, given the J curve effect123 characteristic of the European 
VC asset class. 

  Although  private  FoF  operate  over  a  shorter  period  of  10-12  years),  since  publicly-backed  FoF 
typically operate over a long timeframe of 16 – 20 years, it will be difficult for the EC and investors to 
gauge  the  likely  level  of  return  until  the  latter  stages  of  the  FoF’s  operations,  given  the  J-curve 
performance lifecycle of investments in VC. 

123 Euromoney book, “Exposed to the J-curve - Understanding and Managing Private Equity Fund Investments”, Uli Grabenwarter. 

88 

 
 
 
 
 
 
                                                           
Options analysis & key issues 

However,  the  above  risks  are  broadly  similar  to  those  associated  with  other  EU  risk  capital  financing 
instruments  that  have  already  been  set  up.  Moreover,  the  public  sector  may  be  willing  to  accept  the 
higher risks associated with investment in seed and early-stage  VC because  this is an area of identified 
market failure and is crucial to promoting the development of innovative and high-growth SMEs.  

Publishing IRR targets and other data on performance multiples. 

The European Commission should decide upfront whether a FoF should make the target and actual IRR 
publicly available.  Setting a target may be useful at the investor roadshow stage since it would give an 
indication as to how commercial an approach the Commission envisages. 

However,  there  may  be  reputational  risks,  for  instance,  if  the  performance  of  one  or  more  FoF 
supported by the  European Commission within a FoF programme  falls short of expectations. The EIB 
and  the  EIF  do  not  publish  returns  data  which  is  confidential.  However,  it  is  widely  accepted  that 
investing in early-stage VC (seed and start-up stages) is a high-risk asset class. 

A consideration in relation to whether data should be made available is that performance data may be 
misleading given the J curve effect in VC, since the returns are disproportionately concentrated in the 
later stages of FoF implementation.  

4.4.3  Assessment of risks specific to policy options 

It is important that the risks associated with the different options/ sub-options are assessed. Among the 
different  considerations  in  this  regard  are:  (i)  the  political  feasibility  of  each  option/  sub-option;  (ii) 
ensuring  good  governance  and  clear  lines  of  accountability  and  (iii)  technical  execution  risks  and  (iv) 
reputational  risks.  Overseeing  the  set-up  and  operation  of  a  pan-European  FoF  has  a  number  of 
implications for the European Commission. The main risks, the issues involved and how these might be 
managed through mitigation measures is summarised in the table below:  

89 

 
 
 
 
 
 
 
Options analysis 

Assessment of risks and possible mitigation measures 

Definition of 
options 

Overall 
risk 
profile 

Operational risks 

Risks – impact on progress towards achievement of 
policy objectives 

Mitigation measures 

Low 

Operational  

Option  2    –  Increase 
EU 
for 
funding 
existing  equity-based 
financial  instruments 
for innovative SMEs  

Low-
medium 

invest 

Option  3  –  The  EU 
in 
could 
existing 
publicly-
backed national and 
/ or regional FoF 

 

 

Determining  which  equity 
instruments 
should  be 
allocated funding.   
Should this be on the basis 
of  demand  based  on 
current 
programme 
statistics or other criteria?   

Set-up phase  

 

  Willingness of the EIF (or 
another entrusted entity) 
to  manage  the  call  for 
expression of interest 
Operational phase  
of 
GPs/ 
Selection 
underlying 
funds  and 
monitoring  will  require 
human resource.  
The 
limited 
human  resources  and  a 
previous 
lack 
of 
FoF 
experience 
management 
and 
monitoring.  

EC  has 

in 

 

 

 

 

 

to 

inability 

insufficiently 
investors, 

Continued 
lack  of  participation  by  some  market 
participants (pension funds and institutional investors). 
Inability  to  tackle  structural  problems  in  VC  (lack  of 
critical  mass, 
large  funds  to  attract 
fund  multi-
international 
investment stages and loss of economic output) issues. 
Risk  that  some  existing  instruments  are  relatively 
new  (e.g.  pilot  schemes  under  INNOVfin  /  H2020) 
and that there is an insufficient evidence base to go 
ahead  without  an  evaluation  of  their  efficiency 
/effectiveness. 
Continued  lack  of  participation  by  some  market 
institutional 
participants 
investors) 

(e.g.  pension 

funds, 

invest  alongside  the  public  sector 
FoF  operators  are 

  Minor  risk  that  some  private  investors  may  not  be 
if 
willing  to 
FoF  managers. 
national 
Conversely, other investors may be reassured by the 
EC  being  a  cornerstone  investor  given  access  to  EU 
financial  resources  and  possible  access  to  the  EIF’s 
technical expertise in FoF management. 

 

 

 

implemented 

This  option  could  be 
in 
combination with Option 4.1 and / or Option 
3.1. 
If  additional  funding  is  allocated  to  existing 
instruments, ensure that this is on the basis 
of evidence gained through evaluation. 

 

 

Consider  an  outsourcing  solution  i.e.  the 
delegated  management  of  a  new  fund  of 
funds  that  national  operators  can  apply  to, 
to an entrusted entity such as the EIF: 
Ensure  that  the  procurement  procedure  is 
open,  transparent  and  non-discriminatory 
through  organising  a  Call  for  expressions  of 
interest from prospective FoF managers  
 
The selection of underlying fund managers. 
  Monitoring the underlying VC investments.  

Option  4  –  Set  up  a 
seed 
pan-European 
and VC FoF. 

Medium 

Set-up phase  

Asymmetric returns 

Managing reputational risks 

  Willingness  of  the  EIF  (or 
another  entrusted  entity) 
to  manage  the  call  for 
expression of interest 
Operational phase  

 

If  a  privately  managed  FoF  model  is  adopted,  an 
asymmetric returns could pose some reputational risks 
to  the  EC  e.g.  citizens  could  perceive  the  scheme  as 
overly generous to the private sector. 
Financial sustainability  

  Make  baseline  situation  and  supply-side 

 

market failures clear in key literature. 
If under a pari passu model, ensure that the 
FoF  is  free  from  too  many  constraints  so  as 
to maximise IRR / operate commercially. 

90 

 
 
 
 
 
 
 
 
 
 
 
 
 
 
Options analysis 

Assessment of risks and possible mitigation measures 

Definition of 
options 

Overall 
risk 
profile 

Operational risks 

Risks – impact on progress towards achievement of 
policy objectives 

Mitigation measures 

 

 

 

of 
funds 

GPs/ 
and 
require 

Selection 
underlying 
monitoring  will 
human resource.  
The  EC  has  limited  human 
resources  and  a  lack  of 
previous experience in FoF 
management 
and 
monitoring.  
Exit  
Achieving poor investment 
performance  /  RoI  linked 
the 
timing 
to 
economic  cycle  when  FoF 
launched. 

the 

in 

 

 

 

funding 

long-term 

Is  the  EC  able  to  ensure  a 
commitment of 12 years+? 
Is  the  EC  in  a  position  to  make  an  ongoing  financial 
commitment  beyond  the 
lifetime  of  a  particular 
programming period (e.g. H2020 and COSME)?  
If a FoF programme is supported, there may be a need 
for  ongoing  financial  commitments  e.g.  following  fund 
closure  of  first  generation  of  FoF,  after  3-5  years,  to 
maintain  momentum,  there  may  be  a  need  for  a  2nd 
generation of FoF with further EU money. 

 

If  under  an  asymmetric  model,  ensure  that 
is  given  sufficiently 
the  private  sector 
attractive 
investment 
(including  from  international  investors)  but 
not so generous that EU could be accused of 
giving the private sector most of the upside. 

secure 

terms 

to 

Meeting  additional  funding  commitments  in  an 
EU FoF context  

 

If the EC (or an entrusted entity) selects only 
top-performing,  highly  experienced  FoF 
managers,  then  it  should  generate  sufficient 
returns  over  the  medium-long  term  to 
generate a self-sustaining FoF programme. 

Poor investment performance/ overcoming cyclical 
factors. 

investment  period 

Ensure  that  the 
for  each 
individual  FoF  supported  is  up  to  5  years  (and 
subsequent  disbursements  in  underlying  funds  at 
different investment stages is spread out over time. 
Avoid over-dependence on a single, vintage year. 

Differentiate with existing EIF provision  

Ensure  that  in  finalising  the  design  of  the  FoF 
programme  that  there  is  a  strong  emphasis  on 
commercial  returns  and  on  attracting  international 
capital. 

Ensure  that  the  new  FoF  mechanism  has  strong 
branding  to  ensure  clear  differentiation 
from 
existing EIF FoF provision and from other EU equity 
instruments (also applies to Option 2). 

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4.4.4  Overview of the feasibility of the different options 

4.4.4.1  Feasibility of options  

An  assessment  of  the  feasibility  of  the  different  options  was  carried  out  taking  into  account  technical 
difficulties,  as  well  as  potential  execution  and  reputation  risks  described  in  the  previous  section.  The 
extent to which particular options/ sub-options have a high level of feasibility or conversely a low chance 
of being viable was assessed. This required forming an evaluative judgment based on extensive interview 
feedback and desk research.  

In  the  following  Figure,  the  options  are  summarised  diagrammatically,  in  order  to  show  the  different 
alternatives from a policy maker perspective and to assess their relative feasibility: 

Figure 16 - The options and sub-options ranked by feasibility 

Option 1 is feasible since it would not require any further action at EU level. Options 2 and 3 (and their 
respective sub-options) are generally feasible since these would not require setting up new instruments 
or funding programmes. However, they could risk reinforcing the dominant role the public sector already 
plays in European seed and VC. Moreover, increasing funding to existing EU financial instruments would 
be difficult to justify in some cases because the instruments themselves are relatively new, such as the 
pilot project for technology transfer within Horizon 2020. However, increasing  funding for the EIF’s FoF 
programme (Option 2.1) could be highly feasible, since it has been underway for a number of years and 
would  help  to  continue  to  address  supply-side  challenges  in  some  under-served  markets  for  VC.    This 
would however have to be subject to a thorough demand-side analysis to test absorption capacity. 

Option 4.1 had more stakeholder support than the other options, on the basis that although Options 2 
and  3  are  credible  approaches,  they  would  not  address  the  underlying  structural  problems  facing  the 
European VC ecosystem, namely the absence of sufficient private sector participation to ensure its longer 
term sustainability.  

4.5  Synthesis of findings on policy options and identification of preferred option 

Having  examined  the  stakeholder  feedback  and  the feasibility of  the options,  the  overall  findings  were 
that: 

1.  Most stakeholders were not in favour of Option 1, the “no policy action” scenario, on the basis that 
structural  problems  remain  in  European  VC.  However,  approximately  20%  of  stakeholders  and 

92 

 
 
 
 
 
 
 
Options analysis 

questioned  the  value  of  additional  public  intervention  on  the  basis  that  the  EIF  already  provides 
sufficient investment into seed and early stage VC, especially in market geographies where VC was 
non-existent or under-developed.  

2.  Option 2.1, to increase funding for the Single EU Equity Financial Instrument (funded by COSME and 
Horizon  2020’s  Access  to  Risk  Finance  Programme)  was  viewed  as  being  feasible.  If  additional 
funding  is  potentially  available,  this  could  be  used  to  expand  the  financial  firepower  of  existing 
equity schemes. However, since these have only just got underway, it is too early to evaluate their 
effectiveness. 

3.  Some  stakeholders  maintained  that  Option  3.1  could  help  to  generate  additional  critical mass and 
ensure  that  underlying  VC  funds  were  less  dependent  on  EIF  funding.    However,  working  through 
existing  national  FoF  and  encouraging  a  cross-border  approach  may  help  to  increase  critical  mass, 
but there are no guarantees that the private sector would be attracted, given that existing schemes 
do not operate on a purely commercial basis, at least  according to published IRR/ target multiples 
data available. This could risk continued public sector dominance. 

4.  Option 3.2 did not receive much stakeholder support, mainly because concerns that existing regional 
FoF have  suffered from particularly  poor performance  and are  not  considered commercially viable 
investment targets for private investors. 

5.  An advantage of Options 3.1, 4.1 and 4.2 is that private sector leverage would be achieved at two 
levels,  the  FoF  level,  rather  than  only  through  underlying  VC  funds.  This  ‘double  leverage’  effect 
would be in accordance with the aims of the European Fund for Strategic Investment (EFSI), where a 
multiplier effect of 1:15 is anticipated. 

6.  Under  Option  4.1,  the  EC  could  differentiate  itself  from  existing  EIF  FoF  provision  through  a  FoF 
structure/programme through a requirement for FoF managers (either public or private) selected to 
manage the FoF to raise the additional private capital needed to achieve first and subsequent fund 
closures.  

7.  Option 4.2 was viewed positively by many stakeholders but some cautioned that it would be difficult 
to  manage  a  FoF  with  such  a  wide  scope  and  that  it  would  be  easier  to  diversify  risk  under  a 
programme of multiple FoF (Option 4.1). 

8.  Option 4.3 was  not  viewed as a realistic  option based on the assumption that the results of a FoF 
structure  could  only  be  assessed  after  several  years.  However,  the  EC  could  pilot  the  call  for 
expression of interest and have preliminary discussions with investors in order to further gauge the 
potential interest in and success of such a programme. 

9.  There  was  support  among  some  VC  stakeholders  for  Option  4.4  on  the  basis  that  the  EU  should 
support  new  market  entrants124  to  ensure  that  there  is  an  adequate  flow  of  talented  new  VC 
managers. It takes 10 -15 years to develop a new generation of high-performing and experienced VC 
fund managers.     

10.  A combination of options could be  implemented in parallel. The EU  should set  up a pan-European 
FoF programme but also, subject to EU funding availability, could channel more funding into existing 
financial instruments schemes such as the Single EU Equity Instrument under the Horizon 2020 and 
COSME programmes).   

124 Although the EBRD and the EIF already play an important role in supporting new managers, the research identified some new 
managers that still could not secure funding. 

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Options analysis 

11.  Option 4.1, to set up a pan-European public-private seed and VC Fund of Funds, was identified as 
the policy option preferred by a majority of stakeholders. It was supported by influential industry 
representatives, notably Invest Europe125.  The rationale is set out in the next sub-section “preferred 
policy option”. 

4.6  Preferred policy option 

4.6.1  The preferred policy option - Option 4.1 – setting up a pan-European fund of funds  

This  was  the  sub-option  preferred  by  a  majority  of  stakeholders  and  the  option  which,  if  executed 
correctly,  is  most  likely  to  tackle  some  of  the  supply-side  market  failures  and  structural  problems 
identified  in  this  report  described  in  the  problem  definition.  The  rationale  is  now  explained  in  further 
detail, drawing on stakeholder feedback and desk research: 

  Option 4.1 has the greatest likelihood of contributing towards the achievement of the key EU policy 
objectives defined by DG RTD (e.g. low average size of European VC funds, over-fragmentation of the 
European  market,  lack  of  private  sector  participation  in  European  VC,  inability  to  attract  larger 
international investors to the asset class etc.). 

  This sub-option has the potential to encourage private capital back into the European VC asset class 
and to attract as yet untapped international capital.  A FoF investing in the European VC asset class 
could perform a signalling function for private investors and encourage them to follow suit. 

  An  EU-funded  pan-European  FoF  programme  set  up  by  the  EC  would  help to promote  competition 
and promote new market entrants into the European VC eco-system. Over time, greater competition 
and diversity of supply would reduce the European VC market’s over-dependency on the EIF.  

  Although  such  a  scheme  could  be  open  to  both  private  and  public  fund  managers,  the  emphasis 
should be on generating commercial returns in the private sector as the guiding principle in the set-
up and operation of the FoF in order to attract private investors back to the European VC asset class 
in general but more specifically to fund of funds structures. 

  One  or  several  pan-EU  FoF  would  considerable  increase  the  ticket  size  allowing  larger  institutional 

investors to invest in European VC through a diversified portfolio. 

  The  benchmarking  assessment  showed  that  scaling  up  the  European  VC  industry  to  ensure  greater 
critical mass is crucial. Larger VC funds tend to perform better than smaller ones in terms of IRR, and 
FoF can increase the size of VC funds considerably.  

  This  sub-option  also  has  strong  potential  feasibility,  since  there  is  already  legal  provision  under 

Horizon 2020's InnovFin SME VC product to support fund of funds. 

  Option  4.1  could  also  be  supported  in  conjunction  with  implementing  other  Options.  For  instance, 
legally speaking, Option 2.1 could also be considered (to boost EU funding for the EIF’s existing FoF 
programme),  since  Horizon  2020's  InnovFin  SME  VC  product  also  includes  the  possible  scope  to 
support FoF. 

125  Invest  Europe  position  paper,  November  2014,  Accelerating  Innovation  &  Delivering  Growth:  Using  the  Jobs,  Growth  and 
Investment Package to Attract Private Sector Investors to the European Venture Capital Industry. 

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Options analysis 

4.6.2  Risks associated with the preferred Option 4.1  

Before briefly setting out the proposed configuration of a FoF programme, it is important to give due 
consideration to some of the specific risks associated with going ahead with Option 4.1: 

Table 26 - Description of risks, key issues and mitigation measures 

Type of risk 

Summary description of risk and key 
issues 

Political 
feasibility 

 

The decision to set up a pan-European 
FoF  should  be  demand-driven,  and 
supported by clear evidence of market 
failures on the supply side.  

  Without a thorough assessment of the 
baseline providing evidence of market 
failures,  barriers  to  attracting  private 
investors  and 
international 
larger 
investors,  question  mark  on  public/ 
political acceptability. 

 

 

Technical 
execution  

Some stakeholders may be against the 
private sector being given asymmetric 
returns. 

The EC has a lack of in-house technical 
capacity 
FoF 
programme itself.  

implement 

to 

a 

 

 

 

 

Mitigation measures 

Ensure  that  this  technical  feasibility  study  is 
widely disseminated since the assessment of key 
trends  and  developments  in  the  baseline  (see 
Appendix  C)  establishes  that  private  sector 
investors  will  not  invest  in  FoF  unless  these  are 
commercially focused. 

The  analysis  of  performance  data  in  Appendix  E 
shows  that  returns  are  low  such  that  many 
private  investors  at  the  FoF  level  would  be 
incentives/ 
unwilling 
asymmetries  due 
factors 
to 
(historically low performance returns and double 
fees).  

invest  without 

two  main 

to 

The  EC  will  need  to  put  in  place  measures  to 
ensure  a  long-term  staffing  commitment  over  a 
period of 12 years+. 

In  the  short-medium  term,  secondees  with 
experience  in  the  set-up  and  operation  of  FoF 
could be drafted in on a  2-3  year basis to assist 
the EC during the initial crucial stages.  

  Alternatively, additional staff could be recruited.  

  An alternative approach would be to appoint an 
entrusted entity to manage the FoF programme 
on  the  Commission’s  behalf  (e.g.  the  EIF)  to 
ensure  adequate  resourcing,  expertise  and 
technical knowledge and experience. Delegating 
management  to  an  entrusted  entity  could  also 
help  to  ensure  continuity  beyond  programming 
periods.  

 

Governance 
and  effective 
monitoring 

imposing 
should  avoid 
The  EC 
in  setting  up  the  FoF 
constraints 
programme 
overly 
avoid 
prescriptive  criteria  for  the  selection 
of  FoF  managers  and  geographic  or 
sectoral targeting strategies. 

(e.g. 

 

 

  However, 

minimum 
some 
requirements  will  need  to  be  defined 
(e.g.  checking 
two-thirds  of 
that 
investments are made within the EU) 

in 

place 

appropriate 

governance 
Put 
arrangements  to  ensure  that  the  Commission 
participates  in  monitoring  activities  relating  to 
the FoF programme overall. 

The governance structure could be based on that 
instruments 
adopted 
implemented 
programmatic 
mandates  to  the  EIB  and  the  EIF  (e.g.  H2020, 
COSME). 

for  existing 
through 

financial 
EU 

 

The  EC’s  role  should  be  to  monitor  the 

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Options analysis 

Type of risk 

Summary description of risk and key 
issues 

Mitigation measures 

  Appropriate 

governance 

and 
monitoring  arrangements  will  be 
needed to ensure accountability.  

Reputational 

  Whereas 

the  EIF  has  15  years’ 
experience  in  setting  up  risk  capital 
financing  schemes  (including  FoFs) 
and  knowledge  of  different  VC 
markets  across  the  EU,  the  EC  does 
not  have  sufficient  VC  expertise  / 
human  resource  capacity 
in-house.  
Reputational  risks  may  include:  poor 
performance of FoFs.  

performance  of  the  entrusted  entity  in  fulfilling 
its  delegated  mandate  and 
in  monitoring 
progress  in  implementing  the  FoF  programme 
overall.  

  Appoint  an  entrusted  entity  to  manage  the  FoF 
programme on the Commission’s behalf (e.g. the 
EIF, EBRD).  

 

Ensure  that  reputation  management  is  part  of 
the framework agreement  /  delegated mandate 
with the entrusted entity. 

Timing 

  A  FoF  programme  could  be  launched 
at  the  wrong  stage  in  the  economic 
cycle 

 

  A FoF programme could produce poor 
if  over-dependent  on  a 

returns 
particular vintage year. 

Funding  from  a  future  FoF  programme  to  VC 
funds  should  be  spread  out  over  a  5  year 
investment period to avoid over-dependence on 
particular vintage years. 

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4.6.3  The outline of a pan-European FoF programme.  

The way in which a privately managed FoF would operate is summarised in the following diagram:  

Figure 17 – Design of a pan-European FoF Programme 

Option  4.1  would  involve  setting  up  a  pan-European  FoF  programme  in  which  4-5  individual  FoF 
were established. Although the focus would be on early-stage (seed and venture capital), there may 
be strong arguments in favour of having a multiple investment stage approach. The rationale for this 
would be several-fold:  

  Focusing  on  multiple  investment  stages  (e.g.  early-stage,  late-stage,  expansion  phase)  would 
allow  Europe  to  capitalise  on  the  full  entrepreneurial  and  innovative  potential  of  high-growth 
gazelles and be able to provide follow-on financing.  

  This could over time  help contribute to ensuring the EU captures the benefits for jobs, wealth 
creation and competitiveness through innovation, rather than the upstream benefits from later 
stage VC investments and buy-outs being captured in the US.  

  Not limiting the investment focus to early-stage VC could help avoid the perception among the 
private sector investors that publicly backed fund of funds are more concerned with addressing 
structural market failures in a high-risk, low returns asset class.  

  Blended returns across different investment stages would not only help to diversity risk but also 

improve performance overall. 

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The  detailed  issues  behind  the  different  elements  of  the  design  and  configuration  (set-up  and 
operation)  of  a  FoF  are  outlined 
in  a  separate  standalone  report  (supporting  document  
“Assessment of Implementation Issues – Setting up a pan-European FoF Programme”).  

The table below provides a high-level summary as to how a Pan-European FoF programme might be 
configured. The actual configuration will need to be determined by the European Commission’s DG 
RTD  in  liaison  with  other  interested  DGs  and  in  close  liaison  with  the  EIF,  EBRD  and  industry 
stakeholders.  

Table 27 Preferred policy option - Configuration of the set-up and operation of a Fund of Funds 

Pan-European Fund 
of funds programme 
– key parameters 

Configuration of the set-up and operation of a Fund of Funds 

Set-up 

Target  size  of  each 
FoF  

The  size  of  individual  FoF  should  be  in  the  order  of  €250-€300m  at  first  financial 
closure.  Subject  to  investor  interest  following  initial  roadshows,  this  could  be 
increased to up to €500m. 

Number  of  fund  of 
(1st 
funds 
generation) 

4  to  5  individual  fund  of  funds  (managed  either  by  public  or  private  sector  fund 
managers,  depending  on  which  respondents  to  the  call  provide  the  most 
compelling value proposition). 

 

 

3  or  4  FoF  -  non-prescriptive  i.e.  leave  it  up  to  the  prospective  FoF 
managers responding to the call to propose the most appropriate sectoral 
mix, the balance between different investment stages  

1 FoF could be geographically focused on less well developed VC markets, 
with  an  appropriate  incentives  structure  for  both  the  FoF  manager  and 
investors  to  ensure  that  the  additional  level  of  risk  is  attractive  from  a 
reward perspective). 

Funding sources:  

Possible funding sources include: – 

 

 

EU Horizon 2020 Access to Risk Finance Programme 

The SME Window within European Fund for Strategic Investments (EFSI)  

In terms of the funding mix of each individual fund of funds: 

 

 

 

EU funding – up to 50% 

FoF manager – 5%   

Investor  capital  -  minimum  requirement  for  FoF  manager  to  raise  capital 
from other investors of 1:1 of investor funding to EU funding 

Expectation  that  the  focus  will  be  on  raising  investment  through  investor 
networks  from  the  private  sector,  but  nothing  to  prevent  public  sector 
investors also participating. 

and 
Minimum 
maximum ticket size:  

Individual fund of funds  

Size of individual FoF - €250m - €300m+: 

  Maximum ticket size – €25- 100m 

  Minimum ticket size  –€5m (or to be determined by each  FoF manager in 

their response to the call). 

Fund of funds programme - assumption - size of fund of funds programme in 
the  first  generation  could  be  between  €800m  and  €2  billion,  depending  on 
the target size of individual FoF): 

  Maximum  ticket  size  –  €50m  (note  –  as  the  FoF  programme  expands  over 
successive  generations,  or  the  size  of  FoF  is  increased  in  subsequent  fund-

98 

 
 
 
 
 
 
 
 
Options analysis 

Pan-European Fund 
of funds programme 
– key parameters 

Configuration of the set-up and operation of a Fund of Funds 

raising rounds, this could be increased to €100m. 

 

In  order  to  overcome  the  problem  that  some  larger  investors,  such  as  SWFs 
and  institutional  investors  may  only  wish  to  invest  if  there  is  a  significantly 
higher maximum ticket size, then a legal structure could be established at the 
level of the FoF programme overall in which larger investors seeking a higher 
ticket size bracket could invest. 

Call for Expression of Interests  

The European Commission, assisted by an external expert advisory group. There are 
specialist  consultancies  such  as  Cambridge  Associates  that  have  the  requisite 
knowledge. 

Alternatively,  an  entrusted  entity  such  as  the  EIF  or  EBRD  could  be  appointed  to 
manage the selection process, but would then face a conflict of interest and would 
be unable to respond to the call for FoF managers. 

  Minimum  of  6-12  months  for  initial  fund  closure  (given  the  need  for 

investor roadshows, fundraising activities) 

  A further 12 months+ for achieving target fund size. 

 

12 months+ for any subsequent fund closures. 

Procurement 
mechanism:  

of 
Management 
procurement process 
and  FoF  manager 
selection: 

Duration  of 
raising 
target: 

fund-
to  achieve 

Investment stage 

Multiple investment stages. 

Applicants responding to the Call should specify an appropriate balance in their FoF 
portfolio investment strategy between: 

 

 

 

 

Seed capital 

Early-stage VC  

Later stage VC 

Expansion and growth VC 

Geographic focus 

3-4  of  the  FoF  would  be  pan-European  (but  focus  on  selecting  the  best  VC 
investments without geographic restrictions).  

Sectoral focus 

One of the FoF could be distinguished either through a geographic focus on Central 
and Eastern Europe or could focus on “emerging VC markets”. 

The  FoF  should  not  be  prescriptive  about  which  sectors  to  invest  in  but  should 
mention  a  long-list  of  those  sectors  that  appear  to  offer  greatest  potential  for 
growth of start-ups and SMEs and invite the fund manager to set out whether the 
FoF will be generalist, sectorally focused or a combination of the two by investment 
stage. 

Investment period 

Up to 5 years for each individual FoF to make investments in underlying VC funds. 

This  will  avoid  an  over-concentration  of  investments  in  VC  funds  (and  portfolio 
companies) during a particular vintage year, thereby minimising the risk of returns 
being overly cyclical. 

Fund duration 

12 years.  

Operational 

This  takes  into  account  the  10+2  years  benchmark  common  in  the  private  sector. 
The  research  found  that  the  duration  of  private  FoF  is  typically  shorter  than  for 
private FoF. In determining the fund duration, due account is needed of the fact that 
a period of up to 4 years is needed for divestments by the underlying funds and then 
in turn by the FoF prior to fund closure. 

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Options analysis 

Pan-European Fund 
of funds programme 
– key parameters 

Configuration of the set-up and operation of a Fund of Funds 

Management 
and carry 

fees 

Asymmetric  returns  policy  for  FoF  manager,  subject  to  defined  performance 
thresholds being met.  

In the Call for Expressions of interest, a range for the level of fees and carry could 
be  determined.  The  precise  level  of  fees  and  carry  could  be  negotiated  following 
the selection process between the EC and each individual FoF manager. The specific 
characteristics  of  each  FoF  (including  the  promised  and  actual  level  of  private 
capital  raised  by  the  FoF  manager,  the  %  contribution  by  the  FoF  manager  to 
ensure alignment of interest etc. could be taken into account in determining fees).  

In the following table, the suggested approach to incentives and the returns policy is summarised. 

Exit and returns 

Returns model 

Asymmetric structure for investors (mainly private sector but could also be public 
sector)  

Target IRR 

Target of 15-20%.  Although the very best private equity managers may achieve 
25%+ IRR, it would be better to set a more realistic objective within the context of 
a commercially managed FoF approach.  

Investment multiples 

Since  the  research  suggested  an  investment  multiple  approach  in  addition  to  a 
time-based  IRR  approach  is  appropriate,  a  target  investment  multiple  of  three 
times the principle could be set. 

Upside 

Investors  to  capture  the  upside  beyond  a  pre-defined  return  of  original  capital 
and  profit  for  the  EC,  so  that  EU  funding  can  then  be  recycled  into  subsequent 
generations of FoF programmes. 

Downside protection 

No – not widely supported among stakeholders. 

Distributions policy 

The distributions policy will need to be set out in the fund documents. The fund 
manager  should  assume  overall  responsibility  for  monitoring  the  position  on 
possible  distributions,  although  the  timing  of  these  and  whether  any  will  take 
place cannot be guaranteed (as is industry standard).  

Provision for early distributions could be made (for instance, following successful 
early exits) upon the advice of the fund of fund manager. An alternative would be 
to require the agreement of a majority of the members of the LP (since there may 
be  a  case  for  retaining  and  reinvesting  the  proceeds  in  new  investments  or  to 
meet higher than expected follow-on capital needs).  

Divestment period 

For  the  underlying  funds,  2  years.  For  the  FoF  up  to  4  years,  but  leave  up  to 
individual FoF managers to make sensible suggestions on timeframes. 

4.6.4  Steps involved in setting up a pan-European FoF programme 

There are a number of steps involved in the process of setting up a pan-European FoF, such as:  

1.  Carry out ex ante evaluation, including possible reuse of additional resources 

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Options analysis 

2.  The  appointment  of  an  entrusted  entity  to  select  the  fund  managers  (or  the  European 
Commission could carry out this tasks itself, with support from an external contractor). 

3.  The  launch  of  a  call  for  expressions  of  interest  -  targeted  at  experienced  fund  of  funds 

managers (either public, private or both public and private).  

4.  Selection process and selection criteria for appointing FoF managers. 

5.  Monitoring the selected FoF managers and governance issues. 

The  practical  steps  that  would  need  to  be  taken  by  the  European  Commission’s  DG  RTD  and  the 
timings associated with these processes are summarised in the following diagram:  

Figure 18 - Process for setting up a European Commisison-backed FoF programme 

The way in which these steps should be managed is set out in detail in the  supporting document 
“Assessment  of  Implementation  Issues  –  Setting  Up  a  Pan-European  FoF  Programme”.  This 
provides  detailed  guidance  on  different  alternative  management  and  operating  models,  and 
practical guidance on the selection procedure for selecting experienced FoF managers through an 
open and transparent Call for Expressions of Interest. 

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Options analysis 

4.7  State aids considerations, intervention rates and competition issues 

In examining the different options, especially those relating to setting up a new financial instruments 
scheme,  it  was  important  to  take  into  account  state  aids  considerations,  intervention  rates  and 
competition issues. Relevant EU regulations were reviewed, in particular:   

 

Title  VIII  of  the  EU  Financial  Regulation126  –  sets  out  the  EU’s  rules  on  financial  instruments 
schemes. It addresses state aid and competition issues. 

  Art. 21 of the  revised General Block Exemption Regulation (GBER), 2014127, which addresses 

aid for access to finance for SMEs - Risk finance aid.  

 

The  2014  Guidelines  on  State  Aid  to  promote  Risk  Finance  Investments128    -  these  set  out 
guidelines on aid to investors, including when a pari passu approach is appropriate and when 
asymmetric returns may be justified when there is a demonstrable market failure.  

Overall, the findings from the review of the legal framework for EU financial instruments and state 
aids did not find any major obstacles to going ahead with a pan-EU FoF programme.  State aids (e.g. 
to final beneficiaries, to financial intermediaries, to investors), may be eligible provided that the aid 
fulfils  the  eligibility  requirements  provided  for  risk  finance  aid  under  the  revised  General  Block 
Exemption  Regulation  (GBER).  If  any  elements  of  the  FoF  programme  fell  outside  these 
requirements, then they would have to be notified (they may still be eligible). 

The  maximum  public  intervention  rates  by category  of  undertaking  are  set  out  in  Art.  21  of  the 
GBER.  These  put  in  place  a  sliding  scale  for  the  maximum  public  intervention  rate,  and  the 
corresponding  minimum  private  leverage  requirements  depending  on  whether  the  underlying 
undertakings supported are start-ups, established firms of up to 7 years or firms set up >7 years ago.  

If  the  anticipated  cumulative  level  of  private  sector  leverage  is  achieved,  then  the  requirements 
under the GBER (calculated based on a weighted average) should be met relatively easily. Only in the 
eventuality  that  there  were  difficulties  for  FoF  managers  in  attracting  private  finance  would 
difficulties arise. 

The  investment  strategy  for  selecting  firms  and  the  size  of  investment  in  eligible  undertakings 
would need to be specified upfront in order to check that it complies with the GBER on Risk finance 
aid.  Remuneration  arrangements  would  have  to  be  along  commercial  lines,  but  there  is  a  strong 
emphasis in both the GBER and in the Guidelines on State Aid to promote risk financing on avoiding 
overly  generous  management  fees  and  putting  the  stress  on  performance-related  incentives 
packages for financial intermediaries.   

The  extent  to  which  the  EC  could  provide  private  investors  with  upside  or  downside  protection 
under the state aid rules was also examined. Provided that the asymmetric incentives structure is 
proportionate to the level of market failure, there do not appear to be particular challenges from a 
state aids perspective in allowing investors to capture the upside. However, the proposed structure 
will need to be checked by DG COMP to ensure that it is compatible with the state aid rules on risk 
finance for SMEs laid out in Art. 21 of the GBER.   

Although downside protection was not widely favoured, this would nevertheless be compatible with 
the  GBER  under  Art.  21  (13c),  which  states  that  “in  the  case  of  asymmetric  loss-sharing  between 
public and private investors, the first loss assumed by the public investor shall be capped at 25% of 

126 http://ec.europa.eu/budget/biblio/documents/regulations/regulations_en.cfm  
127  Commission  Regulation  (EU)  No  651/2014  of  17  June  2014  declaring  certain  categories  of  aid  compatible  with  the 
internal market in application of Art. 107 and Art. 108 of the Treaty. 

128 http://ec.europa.eu/competition/state_aid/modernisation/risk_finance_guidelines_en.pdf 

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Options analysis 

the total investment”. In relation to performance, Art. 21 (14c) states that financial intermediaries 
shall receive “remuneration linked to performance, or shall share part of the investment risks by co-
investing  own  resources  so  as  to  ensure  that  their  interests  are  permanently  aligned  with  the 
interests of the public investor”. 

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Conclusions and Recommendations 

5.  CONCLUSIONS AND RECOMMENDATIONS 

The  conclusions  section  focuses  on  the  rationale  for  setting  up  a  pan-European  Fund  of  Funds 
programme and the overall potential benefits of going ahead with the preferred option (or subject 
to  EU  funding  availability,  a  combination  of  FoF  options).    It  should  be  noted  that  conclusions 
relating to the set-up and operation and the configuration of the FoF are incorporated within the 
subsequent recommendations and implementation roadmap section.  

5.1  Conclusions - rationale for setting up a pan-European FoF programme  

The  rationale  for  setting  up  a  pan-European  FoF  programme  to  support  individual  commercially-
focused, public-private fund of funds is centred on a number of arguments.  

Firstly, if EU funds are invested as a cornerstone investment in a  pan-European FoF programme of 
sufficient scale, then this should have important signalling effects and help to attract large private 
investors,  such  as  institutional  investors  and  Sovereign  Wealth  Funds.  Attracting  international 
“flagship investors” could have a strong catalytic effect in attracting new investors to European VC. 

Larger  investors  do  not  typically  invest  directly  in  small  VC  funds  in  Europe,  since  their  minimum 
ticket  size  is  too  large  (in  the  order  of  €25  million  -  €100  million)  to  invest  directly.  Moreover,  a 
general  rule  of  thumb  is  that  for  risk  management  reasons  and  legal  considerations,  they  cannot 
usually invest more than 10% in any one FoF (or underlying VC fund). Attracting larger investors back 
to European VC through a FoF mechanism should therefore help to tackle structural inefficiencies in 
the European market for FoF and help to boost the average size of European VC funds.   

Secondly, a new FoF scheme backed by the EC should focus on achieving optimal return on capital 
to attract the private sector back to the European VC asset class. Many existing publicly-backed FoF 
pursue  at  least  some  public  policy  objectives  and  lead  to  a  combination  of  economic  and  social 
returns. Whilst these objectives may be commendable, sub-optimal returns from publicly driven FoF 
and  the  historical  under-performance  of  the  asset  class  have  been  insufficient  to  attract  private 
sector investors. 

Thirdly,  there  is  a  need  to  ensure  that  innovative,  start-ups  and  SMEs  with  high-growth  and 
internationalisation potential have continued access to external equity capital through staged fund-
raising  rounds  in  order  to  accelerate  their  growth  at  key  development  stages.  The  research 
identified funding gaps within the European VC ecosystem that extend beyond the seed and early-
stages,  where  public  intervention  has  been  focused  in  the  previous  15  years  to  the  growth  phase 
(especially  between  €5m  to  €15m).    It  was  mentioned  by  at  least  20  of  the  105  stakeholders 
interviewed  that  this  has  led  to  many  promising  gazelles  with  strong  potential  relocating  to  the 
US129.  

Fourthly, a FoF should provide a useful counter-cyclical tool at the ecosystem level to overcome VC 
supply fluctuations during economic downturns. Although reduced supply of VC does not necessarily 
mean under-supply of capital, given that it could equally reflect a lack of high-quality projects (e.g. 
demand-side  weaknesses),  nevertheless,  there  was  a  major  reduction  in  VC  activity  during  the 
economic and financial crisis. 

Fifthly,  FoF could  be  an  effective  mechanism to  achieve  a  significant leverage effect  on  EU  funds 

129 Whilst recognising that the reasons that high-growth European firms move to the US extends beyond access to finance 
issues  and  relates  equally  to  framework  conditions  (e.g.  tax  and  incentives,  regulatory  environment),  strengthening  the 
European VC ecosystem through more commercially-oriented FoF able to provide support at all stages of their growth and 
expansion would represent a major step forward. 

104 

 
 
 
 
 
 
                                                           
Conclusions and Recommendations 

through  multipliers  at  both  the  fund  of  funds  level  and  the  underlying  fund  level.  The  leverage 
ratio  is  the  ratio  between  total  investment  in  VC  and  EU  investment  as  a  cornerstone  investor 
(excluding fees). Previous EU equity instruments schemes such as the GIF within the Enterprise and 
Innovation  Programme  achieved  significant  leverage  of  ca.  4  EUR  for  every  1  EUR  of  EU  funding. 
Attracting new sources of (largely) private capital to the fund of funds level is a clear differentiator of 
a pan-European FoF initiative backed by the  EU compared with existing FoF provision through the 
EIF’s FoF programme, and similar schemes run by national FoF operators, where leverage is typically 
achieved at the underlying funds level.   

Last  but  not  least,  many  stakeholders  noted  the  opportunity  costs  for  Europe  of  high-growth 
European SMEs (“gazelles”) moving to the US and the benefits forgone for the European economy 
in terms of the non-contribution of firms relocating outside the EU to the jobs and growth agenda. 
Convincing European start-ups to remain in Europe will however remain an upwards struggle. The 
research found that at every investment stage, European start-ups can raise between two and five 
times130 the amount of capital at the equivalent investment stage in the US. 

There  is  therefore  an  argument  for  EU  support  through  a  FoF  mechanism  at  multiple  investment 
stages throughout the equity financing lifecycle, not only focusing on identified market failures (e.g. 
seed, early-stage VC), but covering the expansion stage, where many smaller individual VC funds are 
unable to fund Series C and Series D expansions.  

5.2  Potential benefits of the establishment of a pan-European FoF programme. 

It  is  important  to  emphasise  the  potential  benefits  of  the  establishment  of  a  pan-European  FoF 
programme. These include, inter alia: 

1.  Attracting international capital that could not otherwise be accessed, due to structural barriers 

associated with the lack of critical mass in VC fund size and over-fragmentation. 

2. 

3. 

Increasing the supply of capital available within the European VC ecosystem generally. 

Increasing  the  average  size  of  European  VC  funds  in  order  to  help  them  compete  globally  to 
attract investment. 

4.  Strengthening  competition  among  the  VC sector  by encouraging  greater  diversity  in  financing 
supply for underlying VC funds. Lessening dependency on the EIF should help to strengthen the 
longer-term sustainability of the European VC industry. 

5.  Delivering significant cumulative leverage effects on public funds by attracting private investors 

at both the fund of funds and the underlying VC funds levels.  

The  combined  leverage  effect  on  EU  funds  is  difficult  to  quantify131  since  it  will  be  dependent  on 
factors such as the stage in the economic cycle when the funds are launched, the prevailing market 
conditions and crucially, the returns structure for investors, which will be determined by the EC at a 
later data, should a FoF programme be established.   

6.  Generating  significant  leverage  through  the  effective  use  of  EU  funds  is  a  policy  goal  of  the 
European  Fund  for  Strategic  Investments  (EFSI)132  Capitalising  on  the  economic  and  growth 
potential  of  high-growth  ‘gazelles’,  which  have  major  potential  to  create  high  value  added 
employment,  promote  innovation  and  greater  efficiency  in  key  sectors  of  the  economy  and 
should generate high tax receipts. 

130 This is confirmed in recent literature e.g. BCG & IESE. 2015. A Rise in Good Deals, but an Investor Drought.  
131 The leverage achieved will depend on a multiplicity of factors. Previous experience suggests that the leverage achieved 
could be in the order of 4:1 to 5:1 (combined leverage) and between 2:1 and 1:1 at the FoF level. 
132 EFSI Regulation (EU) 2015/1017 

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Conclusions and Recommendations 

The above benefits are only likely to materialise in full if there is a strong focus on the commercial 
orientation  of  the  individual  FoF  supported  whose  primary  objective  should  be  securing  optimal 
return  on  capital  and  on  professional  management.  Although  this  implies  that  the  private  sector 
should play a leading role in the FoF programme, there is no particular reason why public or quasi-
public FoF managers should be excluded, provided they can attract private investment, demonstrate 
a strong fund management track record and are able to deliver commercial returns. 

5.3  Recommendations - setting up and operating a pan-European FoF programme 

5.3.1  Structure and set-up of a pan-European FoF programme 

1.  A pan-European FoF programme should be set up with the European Commission (“EC”) serving 

as a cornerstone investor in order to kick-start the first generation of FoF.   

2.  The  EC  should  ensure  that  in  finalising  the  design  of  the  overall  FoF  programme,  one  of  the 
following  alternative  sub-options  for  Option  4.1  is  adopted  so  as  to  ensure  that  large  ticket 
investors can invest in the pan-European FoF programme: 

2.1  Alternative 1 - a dedicated investment vehicle (DIV) could be established at the level of the 
FoF  programme  overall  to  enable  large  investors133  to  invest  alongside  the  EC  as  a 
cornerstone investor.   

2.2  Alternative 2 – instead of targeting individual FoF of €250m-€300m in size, large investors 
could be attracted directly by increasing the size of the FoF to €400m - 500m+134. Under 
this scenario, a DIV at the level of the FoF programme overall would not be necessary. 

3.  Between four and five individual FoF should be selected as part of the first generation of fund of 
funds. The  target  size of each FoF (including private sector funding)  should be circa €150m in 
the  case  of  seed  and  €250m-€300m135  in  the  case  of  a  balanced  venture  fund  (investing  in  a 
combination of early-stage, later stage and expansion stage).  

4.  Consideration  should  be  given  to  a  staged  approach  during  the  first  generation  of  the  FoF 
programme. For instance, two individual FoF could be launched in Year 1, and a further two or 
three in Year 2, to allow time for monitoring (in line with a piloting approach).  

133 Among the potential benefits are that large investors would gain exposure to an entire asset class but through a number 
of individual FoF which in turn would invest in a diversified portfolio of VC funds. This would achieve risk diversification, but 
a problem could be that it may create an additional layer of fees. 
134  However,  the  feasibility  of  this  approach  will  need  to  be  checked  through  consultation  with  leading  private  FoF 
managers to ensure that the target fund size set is realistic – see VCAP case study.  
135 The size of individual FoF may vary. There is nothing to prevent a prospective FoF manager from creating a larger FoF of 
for instance €500m+ if they are able to attract significant scale additional private investment from large ticket investors. 

106 

 
 
 
 
 
 
 
 
                                                           
Conclusions and Recommendations 

Although this would imply running two Calls  for Expressions  of Interest, this could help to mitigate 
some of the initial set-up and design risks. 

5.  The  FoF  programme  should  cover  multiple  investment  stages (seed,  early  and later  stage), to 
help  support  high-growth,  innovative  European  SMEs  (‘gazelles’)  with  world-class  potential 
throughout the equity lifecycle and reduce the number of such firms relocating to the US.  

However,  it  should  not  cover the  European  buy-out  stage,  where  the  private  sector  is  already  very 
active (both European buy-out funds and through US buy-out funds already operating in the EU). 

5.3.2  EU funding sources 

6.  The  FoF  programme  could  be  financed  using  a  combination  of  EU  funding  sources,  namely 
Horizon 2020 funding (seed and early stage), and the SME Window within the European Fund 
for Strategic Investments (EFSI) for later-stage investments (late stage, expansion).  

7.  Funding  commitments  made  should  be  spread over a  5 year  investment  period,  with  funding 
disbursements  made  over  the  course  of  the  multi-annual  programming  period.  This  would 
spread  risk  by  avoiding  over-dependence  of  individual  FoF  performance  and  the  FoF 
programme overall on a particular vintage year.  

8. 

In  order  to  ensure  the  success  of  a  FoF  programme,  the  EC  will  need  to  make  a  long-term 
commitment to a European VC FoF (at the minimum 12 years, under the 10+2 level to reflect 
private sector FoF typical duration)136.   

5.3.3  Selecting individual fund of funds  

9. 

In  setting  up  a  new  financial  instruments  scheme,  the  rules  laid  down  in  Title  VIII  of  the  EU 
Financial  Regulation  must  be  respected.  These  relate  to  the  implementation  of  financial 
instruments  schemes  by  financial  intermediaries  (i.e.  FoF  managers)  selected  “on  the  basis  of 
open,  transparent,  proportionate  and  non-discriminatory  procedures,  avoiding  conflicts  of 
interests”.  

10.  The most appropriate instrument for selecting fund of fund managers, who would subsequently 

set up individual FoF, is a Call for Expression of Interests.  

11.  There is scope in the EU Financial Regulation to delegate the management of a FoF programme 
to an entrusted entity.  The EC (or its entrusted entity acting on behalf of and under instruction 
from the EC), should manage the design and initial set-up directly, supported by expert external 
technical input137.  

12.  However,  if  the  EC's  choice  of  financial  support  mechanism  makes  this  approach  difficult  or 
impossible, a key requirement should be that the investment strategy, as far as the use of the 
EU  budget  is  concerned,  should  be  prepared  by  the  EC.  The  same  applies  to  the  validation  / 
sign-off of the content of the call for expression of interest for fund managers. 

13.  FoF managers appointed to manage individual FoF within the FoF programme overall should be 
required to raise capital from private investors. The capital raising requirements will need to be 
determined through a negotiation process between the EC and the selected FoF managers. This 

136 However, reference should also be made  to the risks and mitigation measures Section 4.6 given the EC cannot make 
cast-iron financial commitments into the future). 
137  An  external  advisory  panel  could  be  used  by  the  EC  to  advise  on  finalising  the  design  of  the  FoF  programme  and  to 
provide impartial advice during the selection process. 

107 

 
 
 
 
 
 
                                                           
Conclusions and Recommendations 

should be at least a 1:1 ratio138.  

Private  sector  leverage  achieved  could  potentially  be  much  higher,  but  this  will  depend  on  the 
asymmetric returns  structure put  in place for  investors by the Commission. It should also be  noted 
that FoF achieve additional leverage through the underlying funds level.   

14.  Subject  to  being  able  to  combine  different  EU  funding  sources,  FoF  should  be  allowed  to 
propose  a  balanced  investment  approach  across  several  investment  stages.  However,  there 
should be a requirement that this should include a minimum of 40% in seed and early stage VC.  

Allowing too much flexibility for selected fund managers of individual FoF could otherwise risk them 
investing  only  in  more  profitable,  later-stage  investments  where  although  there  is  some  evidence 
that further financing supply is needed, there is less evidence of clear market failure. In addition, this 
would avoid the risk of the EU “crowding out” existing market participants.  

15.  FoF managers appointed to manage each individual FoF programme should be required to raise 

capital from investors.  

15.1  This should be in the order of at least a 1:1 ratio (at the FoF level).  

15.2  The  precise  level  will  need  to  be  determined  through  negotiations  with  prospective  FoF 

managers. 

16.  The  level  of  private  leverage  that  is  achieved  at  the  FoF  level  could  potentially  be  higher, 
depending  on  the  asymmetric  returns  structure  devised  by  the  Commission  for  investors. 
Typically,  FoF  achieve  significant  leverage  through  private  investment  at  the  underlying  funds 
level.  

17.  Although  the  focus  should  be  on  attracting  private  capital  into  VC,  subject  to  interest,  public 
sector investors could also be targeted in marketing the initiative as part of investor roadshows, 
since  some  public  pension  funds  manage  significant  assets  and  could  be  interested  in 
investing139.  

18.  The  drafting  of  the  Call  for  Expression  of  Interests  by  the  EC  should  be  non-prescriptive  in 
setting  investment  criteria  to  ensure  that  prospective  FoF  managers  have  the  flexibility  to 
determine how best to achieve optimal risk-reward and to demonstrate their track record and 
experience. 

As  with  EIF  equity  funding,  some  limited  geographical  restrictions  could  be  required,  for  instance 
requiring  that  two-thirds  of  total  investment  in  underlying  VC  funds  should  be  within  the  EU. 
However,  extending  limits  on  the  size  of  investment,  industry  sector  or  imposing  limitations  on 
investments by geography within the EU would be counter-productive.   

19.  In responding to a Call for Expression of Interests, prospective FoF managers should be asked to 

provide a clear enunciation of their investment strategy.  

FoF managers should be asked to propose for instance whether they will adopt a sectorally-focused 
approach or remain generalist, the proposed balance between different investment stages, etc.  

20.  In raising capital mainly from private investors at the FoF level, due attention should be given to 
ensuring that funding attracted is genuinely additional. Any new financial instruments scheme 
does not displace capital that would already have been invested in European VC (e.g. directly in 
underlying funds). It should also not detract from existing EU equity-based programmes. 

138 It should be noted that the minimum 1:1 ratio refers only to the FoF level. The 4:1 ratio mentioned earlier relates to the 
cumulative leverage effects. 
139 For instance, public pension funds have invested alongside the EIF at the fund of funds level in a number of southern 
European countries. 

108 

 
 
 
 
 
 
                                                           
Conclusions and Recommendations 

21.  Investing in the FoF programme should be open to all types of investors, although the relative 
weight  of  individual  institutional  investors,  especially  those  from  third  countries,  should  be 
monitored. 

22.  In order to maintain the momentum of the first generation of a new FoF programme 

22.1  A  second  generation  FoF  programme  should  be  considered,  subject  to  an  external 
evaluation being carried out  of the  first  generation FoF programme  (see monitoring and 
evaluation).  

22.2  The  EC should give  consideration as to how subsequent generations of FoF programmes 

will be funded through subsequent multiannual programmes to ensure continuity. 

5.3.4  Management and operation of the FoF programme 

23.  The  EC  should  either  manage  the  FoF  programme  itself,  or  delegate  the  management  to  an 
entrusted entity (or to a group of entities) through an EC mandate. Currently, however, the EIF 
is the only formally legally-nominated entrusted entity. 

24.  However, the EC should consider this aspect very carefully in order to avoid a situation in which 

the EIF faces a perception of conflict of interest140.  

25.  The EC should set up an expert advisory panel to guide the EC’s DG RTD during the finalisation 
of the design and set-up process141. They could advise on the selection of individual FoF within 
the first generation of FoF.  

The panel could be comprised of independent experts (such as ex-EIF personnel working in the private 
sector, ex-fund or FoF managers, consultants with the requisite technical expertise).  

26.  FoF  managers  of  individual  FoF  programmes  should  be  recruited  from  top-performing  fund 

managers via an open Call for Expressions of Interest.  

27.  Although the initiative should have an emphasis on attracting professional fund managers from 
the  private  sector,  public  sector  fund  managers  should  not  be  precluded  from  participating 
(since they may also have the requisite skills to operate a commercially focused FoF if they are 
not hamstrung by political constraints). 

28.  The FoF manager should commit capital of their own (circa 5%) in order to ensure alignment of 

interest but should be incentivised through a combination of fees and carry. 

5.3.5  Exit and returns 

29.  The  EC  should  give  consideration  to  the  need  to  strike  a  balance  between  offering  attractive 
potential returns to private investors (to attract the private sector back to European VC and to 
generate  high  leverage  on  EU  funds)  and  the  need  to  ensure  public  acceptance  on  the  other 
hand. 

30.  If an asymmetric returns structure is agreed, the precise returns arrangements could be varied 
based  on  the  characteristics  of  individual  FoF  e.g.  a  FoF  proposing  to  invest  in  less  mature 
markets in under-served geographies could be given a higher level of upside.  

140 The EIF could potentially be asked to serve as an entrusted entity. However, it could equally potentially apply to manage 
one of the individual FoFs (by competing alongside other public and private sector participants). 
141 In Canada, the Canadian government has had the support of a Venture Capital Expert Panel. The VCAP scheme has been 
implemented by BDA Development in Canada which has brought in people with a fund management background to advise 
in the design and set-up phases in the selection of High-Performing VC funds.  

109 

 
 
 
 
 
 
                                                           
Conclusions and Recommendations 

31.  Incorporating downside protection was not regarded as realistic, due to concerns regarding the 

risk of moral hazard. 

32.  Early  exit  mechanisms  should  be  incorporated  into  a  FoF  structure  to  allow  the  European 
Commission  and  possibly  other  public  sector  investors  to  withdraw  their  capital  early,  either 
once specific performance hurdles have been met, or at particular time junctures in the FoF’s 
duration (e.g. after a minimum of 5 years).   

33.  In defining an appropriate returns structure for investors, the state  aid rules laid down in the 

GBER Regulation on risk finance aid (Art. 21) will need to be fully respected.  

5.3.6  Attracting investors and achieving a successful fundraising 

34.  In order to attract private sector investors back to the European VC asset class and to attract 

new, large-scale international investors, the FoF programme should: 

34.1  Ensure  that  the  FoF  programme  is  commercially-oriented  and  not  subject  to  political 

constraints.  

34.2  Adopt as non-prescriptive an approach as possible in determining the requirements in the 
Call  for  FoF  managers,  especially  with  regard  to  the  investment  strategy  (sectors, 
geographies).  Only  basic  minimum  requirements  should  be  set  e.g.  setting  a  ceiling  on 
investment outside the EU of up to one-third142.  

35.  The EC should launch a series of investor roadshows both within the EU and internationally in 

order to promote participation in the FoF programme.  

Experience from the Canada VCAP scheme suggests that it takes time to build the momentum of a 
FoF programme and to prompt interest and to secure funding from private investors. This requires 
patience and political commitment on the part of the cornerstone investor. 

36.  The  EC  should  set  a  realistic  timeframe  to  achieve  first  fund  closure  and  to  complete  the 
subsequent fundraising rounds. This might be in the order of 6-12 months for first fund closure, 
but 12-24 months to achieve target fund size.  

Fundraising  timetables  are  markedly  different  in  the  private  sector.  Whereas  an  EIF-backed  FoF 
seeking funding contributions from other public sector co-investors may succeed in raising the target 
FoF size within 3-6 months, this could take 12 months to first fund closure and up to 24 months to 
achieve  target  FoF  size.  There  is  a  need  to  allow  FoF  managers  selected  to  operate  individual  FoF 
sufficient  time  to  carry  out  investor  roadshows,  to  tap  investor  networks  and  to  conclude 
negotiations on fees. 
The research shows the timeframes for fundraising are very different from publicly backed FoF143. 

37.  If  one  of  the  FoF  were  to  be  geographically  focused,  then  additional  performance  incentives 
could  be  provided  to  FoF  managers.  In  addition,  more  generous  asymmetric  returns  could 
possibly  be provided to private investors to generate  interest in under-developed VC markets 
within the EU, although arguably the EIF’s FoF programme and the EBRD’s funding schemes are 
already addressing geographic market failures. 

5.3.7  Governance and transparency 

38.  The  FoF  programme  should  be  set  up  and  its  operations  supported  by  an  appropriate 

142 This criterion appeared to be broadly accepted by stakeholders and would be consistent with EIF practice.  
143  For  instance,  the  Baltic  Innovation  Fund,  backed  by  the  EIF  as  a  cornerstone  investor  and  three  national  financing 
agencies achieved fund closure within 3 months. However, the funding was all public sector. 

110 

 
 
 
 
 
 
                                                           
Conclusions and Recommendations 

governance framework to ensure good governance and transparency. The existing governance 
arrangements for the Single EU Equity Financial Instrument in 2014-2020 represent a potential 
model. 

39.  At the design phase in setting up a FoF programme, it will be necessary to set out requirements 
that ensure alignment of interests between the FoF manager, public and private investors. 

40.  The EC or its entrusted entities (or alternatively a group of entrusted entities)  should assume 
lead  responsibility  for  managing  the  first  generation  of  a  FoF  programme  and  should  then 
provide regular feedback and monitoring data on implementation to a Monitoring Committee 
(comprised of representatives from the EC and selected invited experts).  

41.  Individual FoF managers appointed to operate each individual FoF should be made contractually 
responsible  for  providing  regular  monitoring  and  reporting  data  to  the  EC  Monitoring 
Committee. This should include basic information about investee companies144. 

42.  In  line  with  Art  21  (15e)  of  the  GBER,  investors  should  be  allowed  to  be  represented  in  the 
governance bodies of the investment fund, such as a supervisory board or advisory committee. 
Large investors could make a valuable input to ensuring effective monitoring of the investment 
strategy, FoF performance, etc. 

5.3.8  Monitoring and evaluation 

43.  Ongoing monitoring should also be carried out of the FoF programme’s implementation and the 

performance of FoF managers.  

44.  The EC as the overall manager of the FoF programme should collect monitoring data regularly 
on implementation, such as basic information on the number of VC funds invested in by year.  

45.  An  overall  evaluation  and  monitoring  framework  and  robust  methodology  should  be  put  in 
place for the  future  FoF programme. Providing appropriate monitoring and performance  data 
should  be  a  condition  agreed  upon  by  all  recipients  (i.e.  underlying  VC  funds)  for  receiving 
public funds. 

46.  Performance data should be collected from FoF, but is it unlikely that this will present a clear 
picture  for  the  first  five  (and  possibly  10)  years,  given  the  J-Curve  effect145  whereby  returns 
occur during the latter stages of a FoF’s existence, reflecting the long-term investment nature of 
VC as an alternative asset class. 

47.  Monitoring data should be made publicly available at periodic junctures.  However, due caveats 
should be added to avoid misinterpretation of the FoF programme’s performance, given the J-
Curve and long-term investment and divestment strategy needed to achieve success in FoFs.  

48.  The  EC  should  periodically  commission  external  evaluations  of  the  performance  of  the  FoF 
programme  overall  to  inform  strategic  policy  developments.  An  initial  evaluation  should  be 
carried out of the performance (and extent of contribution towards EU policy objectives) of the 
first  generation  FoF  programme.  This  should  ensure  that  lessons  learned146  are  fed  into  the 
development of subsequent generations of FoF. 

144 A model is provided as to the type of information required in the Canadian VCAP scheme - Appendix C – Profiles 
of Investee Companies 
145  Exposed  to  the  J-Curve:  Understanding  and  Managing  Private  Equity  Fund  Investments,  Uli  Grabenwarter,  European 
Investment Fund; IESE University of Navarra, February 2005 
146 Even though they are at an early stage in their implementation, evaluations have been conducted of some existing FoFs, 
such as the UKIIF in the UK and of the Danish Growth Fund.  

111 

 
 
 
 
 
 
                                                           
Conclusions and Recommendations 

5.3.9  A  broader  support  package  to  promote  a  sustainable  European  Venture  Capital 

industry and ecosystem.   

49.  Any  future  possible  European  Commission  initiated scheme  to  set  up  a  pan-European  VC  FoF 
programme  should not  be presented as an isolated initiative, but  be  incorporated into a new 
holistic policy Communication setting out a package of measures to support the development of 
a more globally competitive and sustainable European VC industry.  

50.  The future EU policy Communication should include any new measures envisaged, such as:  

50.1  Setting up a first generation, pan-European VC FoF programme to attract globally-leading, 
high-performing fund managers  to manage  each of the  individual FoF and to attract the 
private sector back to the European VC asset class. 

50.2  Technical capacity-building measures should be put in place in less mature markets for VC 
managers  (GPs),  and  if  appropriate  also  for  FoF  managers  (LPs)  to  help  develop  a  new 
generation of quality fund managers in emerging VC markets.   

50.3  Awareness-raising  seminars  about  VC  as  an  asset  class  for  prospective  investors  (LPs) 
could also be organised in less mature markets, since there appears to be demand for such 
events. The participation of representatives from the EIF and the EBRD in such events will 
be crucial to their success. 

50.4  Giving  further  consideration  to  a  possible  new  small  dedicated  funding  scheme  (see 

Option 4.4) to encourage new VC fund managers by providing gap funding.  

51.  The future EU policy Communication should then summarise existing EU support to help foster 
the  European  VC  ecosystem  and  the  important  role  player  by  the  EIF,  the  EBRD  and  national 
financing of fund of funds.  

There is already a wide range of existing EU financial instruments that help to ensure the supply of 
VC within the European Union, especially in less developed market geographies. It is important that 
existing initiatives, including the size and scope of the EIF’s FoF programme and direct co-investment 
activity  are  summarised  so  as  to  delineate  the  scope  (and  possible  limitations)  for  further  EU 
intervention. 

112 

 
 
 
 
 
 
 
 
 
 
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This  study  examines  the  potential  for  EU  investment  into  venture  capital  (VC) 
funds-of-funds  operating  at  EU  level.  It  makes  a  strong  case  for  supporting 
several  such  multi-country  funds  in  order  to  help  address  Europe's  equity  gap, 
remedy  the  fragmentation  of  the  VC  market,  and  improve  the  performance  of 
European  VC  funds  in  raising  finance  from  major  institutional  and  other  private 
investors.  The  study  advocates  that  such  a  programme  of  pan-European  VC 
funds-of-funds  should  not  be  an  isolated  initiative,  but  one  accompanied  by  a 
package of measures such as a capacity-building scheme for VC fund managers 
in less mature markets, and an awareness-raising initiative promoting VC as an 
asset-class to prospective investors. 

Studies and reports 

doi: 10.2777/997836 
ISBN 978-92-79-55179-6